Trying to discern the direction of the world economy is a job fraught with danger, but there are clear signs that its weakening is having an impact on Australia despite the more positive outlook on the US economy.
For much of the past three months, the focus on the US economy has been around US Treasury bond yields and the fact that the yield curve went “negative”. As I have noted in the past, this is when the bond yield (or interest rate) for long-term bonds (such as 10 year or 20 year bond) is lower than for short-term bonds – anything under two years.
Since the middle of May, the yield for a one-month Treasury bond has been higher than for a 10-year bond.
This means investors believe interest rates will fall over the next 10 years relative to where they are now. And given interest rates falling is something that occurs when the central bank feels the need to stimulate the economy, a negative bond yield curve has been a pretty good predictor of a recession:
But in the past week the yield for US 10-year treasury bonds rose dramatically as the markets began to get less worried about Trump’s trade war with China.
The big issue with the negative yield curve this time is that while it is not a good sign for the economy, it is largely a man-made stuff up – and that man is Donald Trump. Should the clown in chief of the US work out a way of making a deal with China that essentially sees a return to the status quo, which he would no doubt spruik as some sort of triumph, then the US economy should mostly just carry on.
The markets are becoming more hopeful that this will occur, given it has inevitably been the path of Trump’s economic policies – make a big noise about undoing everything, and after it turning out horribly, getting a couple of trivial concessions that allow him to claim victory.
But there are signs that the world economy has hit some speed bumps that have had a real impact on Australia’s economy – and they can be seen directly in the number of visitors coming to our shores each month.
Coming to Australia is a big trip for anyone from the northern hemisphere. To come here on a trip suggests the financial conditions are favourable due to our exchange rate, and that people feel financially solid enough to pay for it.
At the moment, our exchange rate is as favourable for inbound tourists as it has been for over a decade:
With the value of our dollar at US$0.68, a US tourist gets A$1.47 for every US dollar. That makes for a cheap trip.
The Australian dollar over the past year has fallen against the major currencies of the Japanese yen, the Chinese yuan, and the euro:
We have in effect become a cheaper destination for people to visit.
And yet over the past year the number of short-term visitors to Australia has grown by just 3.4% – the slowest annual growth for six years:
The slowdown has been most pronounced with visitors from China, which is our biggest tourism market.
In the past 12 months around 1.45 million people visited Australia from China – nearly 16% of all short-term arrivals. But that was just 1.2% above the previous year – the slowest growth since the GFC period:
There has been a nice pick-up in the number of Japanese arrivals, clearly taking advantage of the very strong yen. But we have also seen a very quick drop in the growth of tourists coming from the US.
While the US numbers look to be improving, they account for just over half of the number who come from China:
The weakness in the Chinese economy is clearly having an impact on tourism numbers to Australia. It is also likely that the current tensions between Australia and China over the US-China trade war and other issues such as the South China Sea are having an impact.
The economic news from overseas is generally poor – the Brexit issue and concerns within the EU have seen a marked slowing of the European economy, and the China-US trade war is hurting both nations for little purpose.
While Australia remains a long way from having to worry about a recession, our economy is not immune from international troubles – indeed, as a small, open economy we are strongly affected.
The tourist industry is one of the sectors of the economy most vulnerable to economic changes. A weakening domestic economy can see a slowing of Australians spending money on holidays, and a weakening world economy sees a drying up of international tourists.
At the moment our weak exchange rate should make Australia an enticing destination, and yet the growth of tourists from overseas is slowing dramatically.
It highlights that the problems our economy faces should not be understated, and that Australian households are not the only ones struggling with slowly growing living standards.
• Greg Jericho is a Guardian Australia columnist