As the 2016 calendar year fast comes to a close we naturally turn our attention to 2017 and speculate what the new calendar year will bring to the Australian economy and more specifically to the printing industry? Within months of each other two global events shook the foundations of the global community. Firstly in June the United Kingdom went to the polls to decide whether or not to leave the European Union and following the shock referendum outcome to exit the European Union the global community started assessing the likely economic impact of Brexit. In November the global community faced another seismic shock when Donald Trump, defying the polls and all the odds, was declared the winner of the US presidential elections.
The question once again raised was what Trump’s electoral victory would mean for the global economy, the Australian economy and the printing industry. In this column I will review the economic and political factors taking shape globally and domestically and evaluate their likely impact on the printing industry.
Trump trumps Brexit
Political factors influence and shape economic outcomes. The uncertainty created over Brexit for instance according to media reports has resulted in more than $107bn of investments being cancelled or postponed by British businesses. Donald Trump’s win in the US initially created uncertainty and since equity markets do not like uncertainty stock markets crashed globally as news firmed that Trump is likely to become the next US president. The equity markets however rebounded strongly the following day suggesting that the initial fear and anxiety had been overcome as the newly elected president by sounding more conciliatory and statesman like succeeded in somewhat reassuring the global community that faced by post-election realities some of the populist measures announced during the election campaign will now be either toned down or jettisoned altogether.
The impact on the Australian printing industry of Trump’s victory will not be a direct one as Trump does not despise the Australian printing industry and at no time during the election campaign did he advocate any specific policy measures to target the industry, unlike his willingness and preparedness to target cheap Asian imports with a tariff or to keep Mexican economic refugees out with the threat to construct a wall on the US-Mexican border.
Being a business person Trump has a pro-business, economic growth and job creation economic policy agenda. In the short term there is likely to be some uncertainty until such time the global community sees what the actual policy agenda of the Trump administration is. While volatility may be associated with equity markets over the coming months, in the medium to long term if Trump’s administration actively pursues their pro-business agenda then equity markets are likely to respond positively to such developments.
Under Trump we expect to see a push to raise official interest rates. The Federal Reserve was already policy inclined to raise interest rates prior to the election but with Trump’s win there will be renewed pressure and momentum to start returning American interest rates to more normal levels.
Fiscal policy will play a more pivotal role under Trump’s administration providing economic stimulus via the proposed tax cuts and creating jobs by renewing America’s infrastructure. If the scale of the proposed corporate tax cuts is implemented by the Trump administration then there will be increased pressure for matching corporate tax reduction in Australia to maintain business competitiveness and attract foreign investment. Besides the infrastructure spending Trump is also committed to creating new jobs by restoring American manufacturing so there is an emphasis on domestic oriented economic growth.
Trade war
In the unlikely event that Trump carries out his threat of imposing tariffs on Asian imports that could trigger a trade war which would be detrimental to Australia. Any measure that would limit Asian exports to the United States would hurt the Australian economy as our raw material and energy exports to our major trading partner China would be affected. Lower Australian exports would reduce national income and negatively impact on the Australian printing industry, with consumption and retail trade impacted. Trade wars are likely to make businesses nervous which could detrimentally impact business sentiment.
If the United Stated raises its official interest rates and we keep ours at their current levels it would start placing a downward pressure on the Australian dollar, which would make our exports more competitive and imports less competitive. For the printing industry that would mean increased cost pressures as essential raw materials and consumables such as paper, ink and technology which are imported start to increase in cost.
The printing exports sector would benefit from a depreciating Australian currency provided the net impact of the currency depreciation remains positive for the sector.
If Trump succeeds in lifting the overall economic growth rate in the United States by positive policies such as increased investment in infrastructure then that should feed into global economic growth and the Australian economy and the printing industry will also benefit over time.
Economic outlook 2017
The Reserve Bank of Australia (RBA) recently released its last Statement on Monetary Policy for the calendar year. The Statement not only provides an overview of developments in domestic and international economic conditions but critically also updates the economic outlook for the Australian economy and the global economy.
The RBA Statement notes that economic growth amongst Australia’s major trading partners is expected to decline gradually over the next few years due to further easing of economic growth in China. Economic growth amongst the major advanced economies is expected to be above potential in part due to accommodative monetary policy settings. These economies however continue to be impacted by slower growth in the working age population, productivity and investment. Political developments such as Brexit have implications for global economic activity.
Global price and wage pressures are forecast to pick up, and unless productivity improves then the overall rise in global inflation may be greater which could push interest rates up resulting in tighter monetary policy settings in other economies and a depreciation of the Australian dollar.
The outlook for global commodity prices remains positive, which is expected to deliver positive movements in Australia’s terms of trade.
Domestic economic activity forecasts are conditioned by a number of technical assumptions made by the RBA, such as the cash rate moving broadly in line with market pricing, and the exchange rate remaining at its current level over the forecast period. Other assumptions include the price of Brent crude oil being around US$50 per barrel, and the population growth for those aged 15 years and above growing at 1.6 per cent over 2017.
Economic growth in Australia is forecast to be in the range of 2.5 per cent to 3.5 per cent over the year to June 2017, before increasing to around 3-4 per cent over the year to December 2018.
Household demand which is a critical economic driver for printing industry growth is expected to be supported by low interest rates and gains to employment and wealth.
Consumption growth is also expected to increase gradually over the forecast period but the RBA Statement notes that it is not forecast to reach growth levels reached during the period prior to the global financial crisis as growth during that period was driven by robust income growth, rising labour force participation and rising debt and housing equity withdrawal. Noticeably, the updates forecasts for consumption and disposable income now also imply a slower gradual decline in the household saving ratio.
Dwelling investment will continue to provide stimulus to economic activity and the forecast has been revised up slightly. Ongoing solid growth in public investment at federal and state level also forms part of the forecasts.
Exporters are expected to continue benefiting from the depreciating Australian dollar with both tradable and service exports forecast to grow strongly.
With mining investment expected to continue declining the prospect for a pick up in non-mining investment continues to remain weak according to the RBA Statement.
Employment growth over the next six months is expected to remain modest and the participation rate is forecast to remain near current levels. The unemployment rate is forecast to edge lower over the forecast period.
Underlying inflation is expected to pick up but continue to remain low at around 1.5 per cent to 2.5 per cent by the end of 2018.
Headline inflation which influences price adjustments in contracts and wage outcomes is forecast to rise to between 1.5 per cent and 2.5 per cent by early 2017 and remain within that range until the end of 2018.
Wage inflation is expected to remain at current levels during 2017 before starting to pick up gradually in line with improvements in the labour market and the positive flow on effects from improvements in the terms of trade.
Print industry prospects
The RBA Statement projects economic growth in Australia returning to more robust levels towards the end of 2018 with trend growth expected to prevail until then. With inflationary and wage pressures forecast to remain subdued over the forecast period, ongoing improvements in printing productivity will help deliver increased industry prosperity.
One critical factor for the printing industry will be movements in household consumption and savings patterns. As the RBA Statement states if households become more confident about their future employment, income and wealth prospects then the savings ratio could fall by more than currently forecast and consumption growth would be stronger. However, the savings ratio is unlikely to decline if households hold a pessimistic view about future income growth especially those households servicing sizeable debts. If that occurs consumption would be lower than forecast. Printing industry participants will be economically better off in the former scenario.
Pivotal economic indicator moving forward for the printing industry over 2017 will thus be movements in the savings ratio. The above chart depicts the recent reported movement for this pivotal economic indicator. Increased saving ratio tends to be associated with reduced economic activity while reduced saving ratio is often associated with increased economic activity.
Conclusion
Both Brexit and the Trump’s electoral triumph in the United States have played their part in shaking the global economic foundations. While one cannot rule out further seismic economic or political events, the release of a pragmatic policy agenda by the new Trump administration should play a pivotal role in reassuring global economic and equity markets.
Such a development will be welcome and could provide a much needed boost to global economic activity. The economic impact of Trump’s win on the Australian printing industry will be an indirect one. If Trump manages to trigger a trade war with Asia then there could be serious economic consequences for Australia and the printing industry. Some negative consequences would also be expected if the significant corporate tax cut proposal for the United States is not matched by noticeable downward movements in the corporate tax regime in Australia as that could potentially deprive Australia of billions of dollars in global investments. If on the other hand Trump manages to boost American economic activity by boosting investment in infrastructure without resorting to a damaging trade war with Asia, then the net impact on global economic activity which includes Australia is likely to be largely positive.
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