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2019 will be better than expected

By Michael Knox - posted Friday, 28 December 2018

After a number of years of effort, Japan is also achieving a modest level of inflation. We think that CPI inflation in Japan will grow by 1.4% in calendar 2018. This should rise slightly to 1.7% in 2019. Japanese inflation is still below its targeted level of 2.0%. Although this inflation target has been in place since 2013, the target level of inflation has never yet been achieved. However, positive inflation in Japan is reducing real interest rates. This provides further support for growth in the Japanese economy.


In 2017, Australia produced a through the year growth of 2.4%. Although this was a healthy performance by the standard of other wealthy economies, it was below Australia's long term performance. An increase in the terms of trade during 2017 produced stronger growth in the Australian economy in 2018. We think that the Australian economy will grow by 3.2% in 2018. This growth should accelerate to 3.3% in 2019.


In spite of a better economic performance in 2018, inflation is likely to rise by only 2.0%. We think it will rise by 2.3% in 2019. This low level of inflation is brought about by Australian unemployment being above the natural rate of unemployment of 5%. This means that unemployment has not fallen to a level where a tightness in the labour market will generate upward pressure in real wages.

Only when real wages begin to increase will this put upward pressure on inflation. Only when this inflation rises toward the upper end of the RBA range of 2% to 3% will the RBA react by increasing interest rates. We are firmly of the belief that there will be no increases in Australian interest rates in calendar 2019.

Figure 2: Asian Economic Perspective

SOURCE: Morgans


Chinese economic growth in 2018 was marked by a dramatic acceleration in the manufacture of steel. Chinese steel production rose to an all time record high of 81.42 million tonnes per month in July 2018. This meant that production was up by slightly more than 20 million tonnes per month from the level of 61.1 million tonnes per month in February 2017. This increase was the biggest annual increase in absolute terms since the expansion of Chinese steel production in 2009 which served to lift the Chinese economy out of the global recession. The Chinese economy seems now to be driven by strong domestic factors. One of these is demand for infrastructure associated with the domestic building industry. The second is the demand for infrastructure with the Belt and Road Project.


Uncertainly has prevailed over the renegotiation of the Chinese trade position with the United States. However, at the close of 2018, it is apparent that the Chinese government and the US government are making considerable efforts to come to an agreement over

trade in early 2019. We think the initial agreement will include a reduction in Chinese import tariffs on motor vehicles. This will be a great and positive step forward. However, major issues on Chinese use of US intellectual property remain to be negotiated. We think these negotiations will keep both US and Chinese negotiators busy for a few more years to come.


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This article was first published by Morgans.


The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual’s relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so. Those acting upon such information without advice do so entirely at their own risk.

This report was prepared as private communication to clients of Morgans and is not intended for public circulation, publication or for use by any third party. The contents of this report may not be reproduced in whole or in part without the prior written consent of Morgans. While this report is based on information from sources which Morgans believes are reliable, its accuracy and completeness cannot be guaranteed. Any opinions expressed reflect Morgans judgement at this date and are subject to change. Morgans is under no obligation to provide revised assessments in the event of changed circumstances. This report does not constitute an offer or invitation to purchase any securities and should not be relied upon in connection with any contract or commitment whatsoever.

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About the Author

Michael Knox is Chief Economist and Director of Strategy at Morgans.

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