The Ashes Australia vs the UK

Principal Economist, Drew Klease

 

With the Ashes underway in Brisbane this week, the long-held rivalry between Australia and the Poms is once again front of mind. While the better cricket team will be decided over a long summer, which country can claim to have the better economy?

To help us assess the superior economy, let’s review how the first XI economic indicators stack up between the two countries:

  1. Political environment: Both countries are unsettled at the top of the order with relatively new and unproven leadership teams. Following the dual citizenship crisis in Australia, the Coalition has been relegated (temporarily?) to a minority government in the House as well as the Senate. In the UK, the Conservatives have been leading a minority government since the poor election result in June. Just as the English team had to stand down Ben Stokes from the tour, the UK government is also under pressure following the resignation of the defence minister Michael Fallon following an admission of sexual harassment. However, what pushes the advantage at the top of the order towards Australia is the ongoing uncertainty around BREXIT and the lack of progress that the UK has made in its negotiations with the EU over the past year.   
  2. Economic growth and income: Australia on top, with no recession in the past 26 years. Per capita nominal GDP stands around US$52,000 in Australia compared to US$40,000 in the UK. Even focussing on performances over the past year, real GDP growth in Australia is up 1.8% (and likely closer to 3% in Q3 once the national accounts are released) compared to 1.5% in the UK.
  3. Consumer spending: Both countries are under pressure at number 3 and are hard to split. Real consumer spending is up 1.6% over the past year in the UK and 2.6% in Australia. But retail sales data suggest Australia has been underperforming more recently, with retail sales volumes up just 0.1% in Q3 in Australia compared to 0.9% (ex fuel) in the UK.  
  4. Labour market: UK on top. The unemployment rate in the UK has fallen to 4.3% compared to 5.4% in Australia, while annual wage growth remains subdued in both countries at around 2.0-2.2%.
  5. Housing market: UK on top. Housing construction activity and investment is starting to fall in Australia, while it is still rising modestly in the UK. Australian house prices have become stretched relative to fundamentals, while price gains in the UK have been more moderate over recent years following the correction during the GFC. Furthermore, household debt levels are much more concerning in Australia (194% of disposable income), compared to the UK (134% of disposable income)
  6. Business investment: Too close to call. Growth in business investment in the UK (1.3% y/y) and Australia (new investment up 1.5% y/y) are neck-a-neck over the past year. However, momentum is with Australia as the non-mining sector is starting to recover and mining headwinds are diminishing, while BREXIT uncertainty is likely to continue to weigh on UK investment. 
  7. Monetary policy and inflation: Australia on top. In the UK, the sharp post-BREXIT referendum devaluation in the UK pound has pushed inflation up to 3%, forcing the Bank of England to hike rates by 25bps to 0.5% in November despite ongoing soft economic activity. In contrast, the benign inflationary environment in Australia has allowed the RBA to keep rates at 1.5% to help promote the economic recovery.   
  8. Fiscal position: Australian on top. The UK handed down its budget this week, with the budget deficit only forecast to fall slowly from 2.3% of GDP in 2016/17 to just above 1% in 2022/23. Australia’s government finances are in a modestly healthier position, with federal budget forecast to improve from a 1.9% of GDP deficit in 2016/17 to a 0.4% of GDP surplus in 2020/21. More importantly, Australia has a much lower net government debt position compared to the UK (18.4% vs 86% of GDP)
  9. External position: Edge to the UK. The UK current account deficit stood at 4.6% of GDP in Q2, much larger than Australia’s deficit of 2.1% of GDP. However, Australia is much more indebted to the rest of the world (net foreign liabilities of 57% of GDP in Australia vs only 5% of GDP in the UK), leaving the UK with a healthier external position. 
  10. Equity markets: Edge to Australia. So far in 2017, the S&P/ASX 200 has returned 10.1%, compared to 7.8% for the FTSE 100.   
  11. Exchange rate: Australia on top. The Australian dollar is currently trading at 57 UK pence, almost 20% above its post-float average and 26% above the recent low seen in September 2015.

Although Australia’s economic superiority is not as strong as it was during the mining boom, we continue to outshine the UK in a large part due to the fallout and uncertainty caused by BREXIT. Whatever happens over the next five tests, Australia can at least continue to claim economic bragging rights.

 

Table 1: Financial market movements, 16 – 23 November 2017

Equity index

Level

Change

10-yr government bond

Yield

Change

Foreign exchange

Rate

Change

S&P 500

2,597.1

0.4%

US

2.32%

-5.7 bps

US Dollar Index (DXY)

93.22

-0.8%

Nikkei 225

22,523.2

0.8%

Japan

0.03%

-2.7 bps

USD-JPY

111.22

-1.6%

FTSE 100

7,417.2

0.4%

UK

1.25%

-6.0 bps

GBP-USD

1.331

0.9%

DAX

13,008.6

-0.3%

Germany

0.35%

-2.9 bps

EUR-USD

1.185

0.7%

S&P/ASX 200

5,986.2

0.7%

Australia

2.51%

-7.4 bps

AUD-USD

0.763

0.5%

Source: Bloomberg

 

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