At last week’s Exporter Update 2018 in Adelaide, Cassandra Winzenried, Chief Economist at Efic (the Export Finance and Insurance Corporation), gave the audience an overview of global economic conditions and how these could affect Australian wine exports in the next few years. Saying she was ‘paid to worry’, Cassandra reviewed the current risk factors affecting global trade and finished off with good news for Australian exporters.
The recent global economic upswing has reached the two-year mark – with global growth forecast to peak at 3.9 per cent this year and next, the fastest pace since 2011. However, while still strong, the expansion is forecast to become less uniform and may even have peaked in certain economies.
The much talked about slow-down of the Chinese economy is expected to continue, with GDP growth of 6.6 per cent expected in 2018 – the slowest pace since 1990. This slowdown is due to a combination of factors, including Chinese policymakers prioritising financial stability; due to the debt load mounting, the government has increased regulation to tackle debt risk. China is also moving away from an investment- and commodity-driven economic model to a consumption-driven model. Despite these factors, China is expected to remain the most important engine of global growth (see below), with growth in 2017 equating to the value of Canada’s entire economy in purchasing power parity terms.
United States of America (USA)
Economic expansion in the USA has been very strong, with the current period of growth one of the longest on record. Fiscal stimulus is expected to improve growth in the near term, compounding the effect of buoyant asset prices, strong consumer confidence and a low unemployment rate. However, the ‘sugar hit’ of fiscal stimulus is only temporary and there is already anecdotal evidence that business optimism thanks to the stimulus is being offset by the uncertainty around trade policies.
In July 2018, Matthew Fell, CBI Chief UK Policy Director said, ‘We [the UK] have gone from top to bottom of the G7 growth league table.’ Before the Brexit referendum, the UK consistently outperformed the majority of its G7 peers. However, now the economy is stagnating, with a 1.5 per cent growth rate expected for the next couple years. On the other hand, all economies within the European Union expanded in 2017. Growth in Europe, however, is expected to slow this year and next as monetary stimulus is slowly withdrawn and global trade growth eases.
Cassandra listed three main risks that are becoming more salient for the world economy:
1. Restrictive trade policy
The escalation of USA tariffs and tit for tat measures that restrict trade has spiked the Global Economic Policy Uncertainty Index (see below). Higher trade barriers restrict the global supply chain and slow the spread of innovative technologies, which has negative effects on productivity. Higher uncertainty also has negative effects on business and financial market confidence, which dents investment. Australia’s contribution to trade between the USA and China is small, only 0.4 per cent of GDP, but an all-out trade war will hurt Australia with its small, open economy.A study by the Australian Productivity Commission suggests that if everyone increased their tariffs by 15 percentage points, the global economy would fall into recession.
2. Financial volatility
Low interest rates have encouraged an unprecedented debt binge, especially in emerging markets. The USA Federal Reserve is on track to raise interest rates over the next couple of years, which will dilute growth as government funds are funnelled to paying back debts. Tighter financial conditions could also cause disruptive reversals of capital into emerging markets, as we’ve seen recently with Argentina and Turkey.
3. Geopolitical tensions
This includes political challenges, such as those in Europe, regarding fiscal governance and migration.
While there certainly are a lot of risks to keep in mind when working in the global marketplace, there are tailwinds assisting Australian wine exporters overseas.
In China, Australia’s number one destination by value for wine exports, the middle class is surging and is expected to add 350 million people over the period between 2015 and 2022. This trend is expected to nearly triple consumption of goods and services, to US$14 trillion, between 2015 and 2030. This middle class is willing to pay a premium for quality products, meaning that wine consumption is upgrading as more of them start to buy grape-based wine. Market access is also improving, with the final tariff cut as part of the China–Australia Free Trade Agreement set to take place in January 2019.
The Australian dollar has depreciated against the greenback this year, down almost 10 per cent since its January peak. This decline will boost export competitiveness in most overseas markets as it makes Australian products more affordable. Markets expect the Reserve Bank of Australia to keep interest rates at their current level for a while longer yet and predict that the Australian dollar will stay around the current level for another couple of years.
Cassandra Winzenried's presentation from the Exporter Update 2018