Brexit

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<p><span>GUEST OBSERVER</span></p>
<p><span>The departure of Britain from the Eurozone took most pundits by surprise. </span></p>
<p><span>Reviewing past events, we know that markets do not like surprises. The bookmakers expected the occurrence of this event to be rare and global markets are now feeling the immediate aftermath of the result. </span></p>
<p><span>The local property market will not be immune to this. BREXIT has been resisted by the wealthy and educated as these graphs from The Guardian show.</span></p>
<p><a href="/images/2016/07/08/Screen%20Shot%202016-07-08%20at%204.24.59%20PM.png" target="_blank"><span>Click to enlarge</span></a></p>
<p><span><img src="/images/2016/07/08/Screen%20Shot%202016-07-08%20at%204.24.59%20PM.png" alt=""></span></p>
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<p><span>Secret Agent feels that BREXIT could create a bigger hit to the high end property market in Australia than other sections of the market in the short term. </span></p>
<p><span>While auction results after BREXIT were generally robust, we are likely to witness:<br></span></p>
<p><span>Subdued auction results at the higher end of the property market as participants sit on their hands to see what happens. * The commercial market tighten as sophisticated investors try to interpret how this might impact their investments. </span></p>
<p><span>Tighter credit conditions (lending) could result if major banks see an increase in offshore funding costs. The major banks each experienced a 3 - 5% decline on the day of BREXIT.<br></span></p>
<p><span>A further rate cut by the RTBA will become more likely. The yield curve, which is perhaps the best predictor of interest rates indicates further cuts in the short term (see Figure 1). </span></p>
<p><span>One counterintuitive aspect could be an increase in foreign capital to Australia's property market as Australia retains its safe haven status. This could be a medium term by-product, especially if our federal election delivers a clear outcome. </span></p>
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<p><span><em><span>PAUL OSBORNE</span> is managing director of buyers' advocate <a href="https://secretagent.com.au/" target="_blank">Secret Agent</a>.</em></span></p>
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Brexit impact on Australian property: Paul Osborne

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<p><img src="https://counter.theconversation.edu.au/content/67779/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1"></p>
<p>GUEST OBSERVER</p>
<p>Uncertainty about future policy decisions is often identified as major drag on a country’s economy.</p>
<p>Uncertainty about interest rate movements, for example, may see households postpone their consumption, and entrepreneurs wait and see before investing in a business. As a result, aggregate demand naturally weakens, and the economy slows down. </p>
<p>But how relevant is uncertainty, really? </p>
<p>Economists need measures of uncertainty to quantify its impact on the business cycle of a country. A trio of US based economists - Scott Baker (Northwestern University), Nicholas Bloom (Stanford University), and Steven Davis (University of Chicago) recently developed an index of Economic Policy Uncertainty (EPU) for a variety of countries, including Australia. </p>
<p>To create the index, they select country-specific newspapers and perform a search for keywords that are associated with the economy, policy decisions, and uncertainty surrounding such decisions. To the extent that newspapers offer information on perceptions of uncertainty by households and entrepreneurs in that country, this index can be fruitfully used to assess the macroeconomic consequences of spikes in uncertainty. </p>
<p>The graph below depicts the evolution of the Australian EPU since 1997. </p>
<p><a href="/images/2016/11/03/image-20161031-15821-1rstzhw.png" target="_blank"><span class="caption">Click to enlarge</span></a></p>
<p><span class="caption"><img src="/images/2016/11/03/image-20161031-15821-1rstzhw.png" alt=""></span></p>
<p><em><span class="caption">Monthly data from Australian newspapers (Times and Financial Times). Data to July 2016.</span> <span class="attribution"><span class="source">www.policyuncertainty.com</span>, <span class="license">Author provided</span></span></em></p>
<p>Spikes in this index are mostly associated to external events such as 9/11, the second Gulf War, the bankruptcy of Lehman Brothers due to the US sub-prime mortgage crisis, the US debt ceiling dispute, and more recently, Brexit. </p>
<p>Domestic political events also increase the value of the index. Some of the jumps in this EPU index are significant, the largest one corresponding to the Brexit referendum in June 2016. The researchers interpret these spikes as jumps in uncertainty over the policy response of the Reserve Bank of Australia and/or the Treasury to these external and internal events. </p>
<h2>But Australia’s economy remains strong…</h2>
<p>In spite of these fluctuations in uncertainty, however, not much has been going on in the Australian business cycle. </p>
<p>The last official recession in Australia occurred in the early 1990s. Recent figures point to a yearly growth rate of Australia’s real GDP of 3.3%, much larger than that of most industrialised countries in the world. </p>
<p>And Australia’s future is reasonably bright. According to the Reserve Bank of Australia governor Philip Lowe:</p>
<p>"Domestic demand is expected to strengthen gradually as the drag on our economy from the decline in mining investment comes to an end. […] Some pick-up in wages and prices could then be expected. In addition, commodity prices, after having declined over the preceding four years, have increased this year. If sustained, this will boost national income and falls in petrol prices will no longer be having a significant effect on headline inflation."</p>
<p>Recent research conducted by RBA economists makes use of econometric models suited to isolate the role of uncertainty and its impact on Australia’s real activity.</p>
<p>Such research finds uncertainty exerts a negative but fairly small effect on domestic investment and employment growth. </p>
<p>So, why hasn’t uncertainty affected Australia’s economy much? </p>
<p>In work conducted with a pool of researchers based at the Melbourne Institute, I found that jumps in uncertainty are particularly harmful for a country’s growth if they hit a country already experiencing a downturn. </p>
<p>The “uncertainty-recession” multiplier – the negative effects on the overall production of a country due to jumps in uncertainty occurring during a recession – is found to be much larger than the “uncertainty-expansion” multiplier (the negative effects when a country is in a boom). </p>
<p>Intuitively, a reduction in confidence (which is akin to an increase in uncertainty) is likely to more severely affect households and entrepreneurs when a slowdown in economic activity is already underway. </p>
<p>Committing to purchase a car or invest in a new machine can be very costly if economic conditions worsen in future. Reselling a car to pay for rent, clothing or food would likely turn out to be a capital loss, more than a capital gain. And why should entrepreneurs buy a new machine during a recession characterised by high uncertainty? Better to wait until the smoke clears. </p>
<p>On the other hand, during an economic boom any effects of jumps in uncertainty are likely to be (at least) partly offset by expectations of high returns from investment. This means there may not necessarily be a reduction in how optimistic households are, or their consumption.</p>
<p>Monetary policy may also help explain why jumps in uncertainty may be more relevant in other countries than in Australia. Reductions in short-term interest rates can alleviate the negative effects of jumps in uncertainty for the economy by reducing the cost of borrowing. This supports investment by firms and household consumption, helping the country maintain a solid real GDP growth rate. </p>
<p>However, decisions over consumption and investment are likely to become less dependent on interest rates when economic conditions are severe and people in the economic system prefer to save for precautionary reasons. </p>
<p>And countries facing near zero or negative interest rates are likely to experience more severe effects of an uncertainty shock due to the inability of the central bank to lower borrowing costs enough to sustain the economy.</p>
<p>Australia’s growth has been reasonably solid even during the global financial crisis. And it is certainly true that the RBA has gradually decreased the cash rate over the years to offer support to the Australian economy. However, with a cash rate currently set at 1.5%, the RBA still has room for a reduction of borrowing costs if required. </p>
<p>In the absence of a recession or near zero interest rates, it is then not a surprise that uncertainty shocks have not caused major problems for the Australian economy for the last two decades. </p>
<p>All good, then? Well, as long as growth stays solid, yes. The best way policymakers can tame uncertainty and its effects is to keep designing policies aimed at maintaining our growth at a reasonable level.</p>
<p><em><span class="fn author-name">Efrem Castelnuovo is p</span>rincipal research fellow, Melbourne Institute of Applied Economic and Social Research - associate professor, Faculty of Economics and Business, University of Melbourne and author for The Conversation. He can be contacted <a href="https://theconversation.com/profiles/efrem-castelnuovo-145615" target="_blank">here</a>.</em></p>
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Why Brexit and the spectre of President Trump aren’t hurting Australia’s economy

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<p>GUEST OBSERVER</p>
<p>For the second time in the space of ten days, it appears that betting markets and pollsters have got it wrong. First, despite odds showing a 90 percent likelihood of “Remain” winning, the UK voted to “Leave” the European Union in its June 23 referendum.</p>
<p>Now, a mammoth federal election campaign has resulted in political stalemate in Australia, and the result will not be known until Tuesday at the earliest.</p>
<p>Clearly, the repercussions of a hung parliament are not as wide-ranging as “Brexit” and we are unlikely to see Canberra’s streets flooded with protesters. However, when Australian markets open on Monday they will still be faced with a high degree of political uncertainty. Investors do not tend to react favourably to such ambiguity.</p>
<h2>Investors reduce risk under political uncertainty</h2>
<p>Investors tend to respond in one of two ways. The most-common situation is for the political uncertainty to manifest in higher levels of market volatility and a flight to quality as investors try to reduce their exposure to risk.</p>
<p>This was what we witnessed post-Brexit: Australian stockmarkets and the dollar fell by more than 3%, while “safe” government bond yields hit an all-time low.</p>
<p>An alternative is for markets to become locked in stasis – where investors sit on their hands, unsure as to whether they should buy or sell. Market liquidity falls and asset prices become resistant to change.</p>
<p>This is effectively what happened following the hung parliament of August 2010. In the aftermath of that election, stock prices remained within a tight trading range and the dollar hardly budged over the course of the following week.</p>
<p>When the result of the 2016 election is finally known, it appears that the outcome will be either a minority Coalition government or a hung parliament. The Senate is likely to be more fractious than prior to the election.</p>
<p>Talk has already started about potential unrest among the conservative faction of the Liberal Party who supported former prime minister Tony Abbott. There is even discussion of an election re-run if the parliament proves ungovernable. Clearly, this uncertainty could linger for months.</p>
<h2>Concerns for jobs and growth</h2>
<p>The likelihood of a lengthy period of uncertainty is important. It means it will be difficult to pass any economic or budgetary reforms. Without such reforms, it is unlikely the budget will return to surplus in the near future (if ever) and it becomes more likely that the AAA credit rating will be lost.</p>
<p>This creates multiple concerns for Australian financial markets, and the broader economy. A credit rating downgrade will likely increase the cost of funding for Australia’s banks.</p>
<p>The Big Four banks will be particularly impacted given the significant role that offshore funding plays in their balance sheet management. This will mean higher interest rates for borrowers – which would not be beneficial for the housing market.</p>
<p>A prolonged period of uncertainty will make it difficult for firms to finalise investment decisions. At a time when the economy is still attempting to transition away from the boom in mining investment this will dent economic growth and employment. So much for “jobs and growth”.</p>
<p>Essentially, this is a recipe for a “risk-off” environment of declining stockmarkets and a depreciating Australian dollar. It is also likely that the market will price a higher likelihood of a reduction in the RBA target rate at the July or August meeting. This will further aid a continued rally in relatively safe government bonds (bond prices rise as yields fall).</p>
<p>If you consider the ongoing political uncertainty resulting from Brexit and the forthcoming US presidential elections in addition to the federal election, then months of nervous markets may lay ahead.</p>
<p><em><span class="fn author-name">Lee Smales is s</span>enior lecturer, Finance, Curtin University and author for The Conversation. He can be contacted <a href="https://theconversation.com/profiles/lee-smales-104586" target="_blank">here</a>.</em></p>
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Hung parliament may lead to investor uncertainty

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<div class="column">GUEST OBSERVER</div>
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<div class="column">The past week has been dominated by first the anticipation that Britain would vote to Remain within the EU that saw “risk on” in financial markets and shares rally followed by an abrupt move to “risk off” as the referendum saw the Leave vote win by 52 percent to 48 percent.</div>
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<div class="column">The vote to Leave poses risks: to the UK economy which will also face a period of political instability with PM Cameron to step down by October and pro-EU Scotland pushing for another independence referendum; to Eurozone stability over fears that some Eurozone countries may seek to follow the UK; and hence to global growth.</div>
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<div class="column">It also threatens to add momentum to a move away from economic rationalist policies in favour of populism and a reversal of globalisation which would be a negative for long term global growth.</div>
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<br>Reflecting the worries about the impact on the UK and more significantly Europe financial markets reacted sharply in “risk off” fashion on Friday with the British pound (-8.1 percent), British shares (-3.1 percent), the Euro (-2.4 percent) and Eurozone shares (-8.6 percent) down sharply and this seeing global share markets down generally along with the Australian dollar. Safe haven assets such as bonds, the $US, Yen and gold have all benefitted.</div>
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<div class="column">This could have further to go in the short term until some of the dust settles. A concern is that a rising $US in response to safe haven demand will weigh on the Renminbi (sparking new fears of capital outflows from China), commodity prices and emerging countries taking us back to the global growth fears we saw earlier this year.</div>
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<br>However, it’s worth putting all of this in perspective. First the moves in some markets seen on Friday were exaggerated because the moves that occurred during the first four days of the last week when markets thought Remain would win had to be reversed. So, for example, while Eurozone shares fell 8.6 percent on Friday they only fell 2.6 percent over the last week.</div>
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<div class="column">Over the week as a whole US shares lost 1.6 percent, Japanese shares lost 4.2 percent, Chinese shares fell 1.1 percent and Australian shares fell 1 percent. Bad but not monumental. Believe it or not the British share market actually rose 2 percent over the last week. While the British pound fell 8.1 percent on Friday it only fell 4.7 percent over the week as a whole and the $A actually rose 1 percent last week. It was similar with bonds and oil – big moves on Friday but only modest moves over the week</div>
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<br>Second, Britain has only started down a process to exit and has a long way to go yet. It will first need a new PM then later this year formally notify its intent to exit which will then kick off a negotiation process that will then take up to two years to complete. This will determine the ultimate impact on the UK economy – either it will retain free trade access to the EU but have to continue to allow the free movement of people, agree to EU rules and regulations and contribute to its budget or forgo free trade altogether. At this stage its hard to see which way this will go. But the point is that for some time the UK will still be in the EU. </div>
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<br>Third, while the Brexit vote will likely trigger a guessing game as to which Eurozone country will try and follow its lead and ask for a similar referendum it’s doubtful that Eurozone countries will actually seek to leave because the hurdle to leave the Eurozone is higher than Britain leaving the EU as it will mean adopting a new currency, paying higher interest rates, etc. Just think of Greece despite its woes over the last few years consistently deciding to stay in the Eurozone. Countries to watch though are Italy following the recent success in municipal elections of the Eurosceptic Five Star Movement and maybe Spain given the success of Podemos.</div>
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<br>Fourth, the Brexit vote is unlikely to be akin to a Lehman moment because conditions are radically different. Lehman came after a long period of global strength and a credit boom where liabilities and exposures were opaque. That is not the case now and Brexit has been talked about endlessly so is not the surprise Lehman was.</div>
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<br>Finally, central banks have quickly adopted a “whatever is necessary” stance to provide liquidity to markets and support their economies, notably the Bank of England which is already providing £250bn. The ECB is monitoring the situation but its liquidity measures (eg TLTRO) are probably more than enough at present. The more important point is that global monetary policy will remain easier for longer. The Fed certainly will be slowed further in raising rates because it won’t want to put more upwards pressure on the $US which is being boosted by safe haven demand. A G7 Statement decrying excessive currency volatility has arguably given Japan close to a green light to intervene to stop the Yen rising much further. Expect more BoJ easing soon which should help Japanese shares.</div>
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<br>I am not so confident about British assets given the long period of uncertainty the UK will now face both economically and politically. However, the global bout of “risk off” underway is likely to provide a buying opportunity as Europe is likely to hang together, global monetary policy is likely to be even easier than previously thought and the global economy is likely to continue to see modest growth.</div>
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<br>Given that only 2.7 percent of Australian exports go to the UK and that the Leave victory is unlikely to plunge Europe into an immediate recession the main impact on Australia will be on financial markets. This could affect short term confidence and may add to the case for the RBA to cut interest rates again particularly if banks increase their mortgage rates out of cycle due to higher funding costs flowing from an increase in lender caution.</div>
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<div class="column">That said we expect the RBA to cut rates again anyway and a falling $A will continue to provide a shock absorber for the Australian economy. Overall, Brexit barely changes the risk of recession in Australia which remains low.</div>
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<br>The key for investors is to either look through the short term noise caused by the Brexit decision or look for investment opportunities that it throws up as investment markets become oversold.</div>
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<br>Just finally on Europe, the last week saw the German constitutional court approve the validity of the ECB's Outright Monetary Transaction (OMT) program, which partly underpins Draghi's 2012 commitment to do "whatever it takes" to preserve the Euro. This is a big relief because its rejection would have put a cloud over the ECB’s ability to respond to any turmoil in peripheral bond markets that may flow from the Brexit vote.</div>
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<br>Now on to other things!</div>
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<br>In Australia, the big event in the week ahead will be the Federal election (Saturday). Each side of politics is offering very different visions for the size of government:</div>
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<div class="column">Labor is focussed on spending more on health and education and in the process allowing the size of the public sector to increase, funded by tax increases on higher income earners (retention of the budget deficit levy and cutbacks in access to negative gearing, the capital gains tax discount and superannuation). The ALP would also undertake a royal commission into banking and intervention in the economy is likely to be higher than under a Coalition government.<br><br>By contrast the Coalition is focussed more on containing spending, and encouraging economic growth via company tax cuts and mild reforms. Despite the Coalition’s tilt to “fairness” with its super reforms it’s committed to keeping taxes down. It does plan to reinstate the Australian Building &amp; Construction Commission but even with the double dissolution election it’s unclear whether it will get enough votes to do this.</div>
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<br>At this stage the polls suggest the Australian election is too close to call. But it’s a big ask to see the ALP become the first opposition in 85 years to regain government after just one term as it will need to win 19 seats. As such betting agencies have the Coalition as favourite. However, the big issue may be what happens in the Senate with there being a good chance that the Greens and minority “parties” control the balance of power again acting as a huge constraint on the government, which would mean another de facto minority government, ie more of the same. Which in turn mean poor prospects for getting government spending under control over the next three years and for implementing serious productivity enhancing economic reforms.</div>
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<br>Over the 7 weeks since the election was called the Australian share market has fallen 3.1 percent. The next table shows that 8 out of 12 elections since 1983 saw shares up 3 months later with an average gain of 4.8 percent. This may partly reflect relief at getting the election out of the way.</div>
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<div class="column"><strong>Major global economic events and implications</strong></div>
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<br>Fed Chair Janet Yellen’s congressional testimony didn’t really add much. The key is that the Fed is “proceeding cautiously” to give it time to assess whether the US economy and inflation is on track with its expectations and given global uncertainties. Uncertainty and market turmoil flowing from the Brexit outcome is likely to further delay the Fed in terms of raising rates again.</div>
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<br>US economic data was mostly good. While durable goods orders were weak, the June manufacturing PMI rose, home prices rose, home sales were strong, jobless claims fell sharply and home prices continue to rise. And the US’s top 33 banks passed a Fed stress test indicating that they have enough capital to withstand a severe economic shock (involving unemployment doubling to 10 percent.) In other words they are in good shape to withstand any shock flowing from Brexit.</div>
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<br>The Eurozone composite business conditions PMI fell slightly in June with a decline in services (on Brexit fears?) offsetting a gain in manufacturing. It remains at a level consistent with moderate growth though.</div>
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<br>Japan’s manufacturing conditions PMI rose just 0.1pt to a still weak 47.8 in June indicating that growth in June quarter is still struggling.</div>
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<br>A couple of Chinese business conditions surveys moved in opposite directions for June with one up solidly and a small business PMI weakening. So bit of a wash there.</div>
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<br><strong>Australian economic events and implications</strong>
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<br>In Australia, the minutes from the last RBA Board meeting added little that was new with the RBA neutral and on the sidelines for now. However, our view remains that lower inflation and a too high $A on ongoing Fed delays will still see more easing ahead with the next cut likely in August. Meanwhile Australian economic data over the last week was uneventful. March quarter house prices fell slightly according to the ABS but more timely private sector data suggests a renewed pick up since then particularly in Sydney.</div>
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<div class="column">While population growth has slowed from its 2% peak late last decade to 1.4 percent last year it’s still contributing to solid underlying demand for housing. NSW and Victoria are the top states for population growth, and flowing partly from this house price growth. Which in turn partly explains the good state of their budgets. Finally, skilled vacancies continue to see reasonable growth telling us that the labour market remains solid.</div>
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<br><strong>What to watch over the next week?</strong>
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<br>The focus in the week ahead will no doubt see continued reaction to the Brexit referendum, particularly given an EU leaders’ summit on Tuesday and Wednesday.<br>In the US, expect to see a further gain in home prices and a slight rise in consumer confidence (Tuesday), solid growth in personal spending and a slight rise in the core private consumption deflator to 1.7 percent for the year to May, but a slight fall in pending home sales (all Wednesday) and a slight rise in the ISM manufacturing conditions index (Friday) to around 51.5 (Friday).</div>
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<br>In the Eurozone expect bank lending (Monday) and economic confidence readings for June (Wednesday) to remain around levels consistent with continued moderate economic growth. Core inflation data for June (Thursday and unemployment data (both Friday) will also be released. The outcome of the Spanish election on Sunday may also add to short term uncertainties regarding the Eurozone.</div>
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<br>In Japan, expect a slight fall in industrial production (Thursday), a deterioration in the June quarter Tankan survey reflecting the recent earthquake and continued softness in household spending but the jobs market (all Friday) is likely to remain solid helped by the falling workforce. Core inflation (also Friday) is expected to fall to 0.6 percent yoy in May.<br>In Australia, apart from Saturday’s election, expect the trend in new home sales (Wednesday) to remain modestly down, ABS job vacancies for the 3 months to May to rise consistent with monthly vacancy data and continued moderate credit growth (Thursday) and a slight softening in home price momentum in June (Friday) according to CoreLogic. The AIG’s manufacturing conditions PMI (Friday) will also be released.</div>
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<br><strong>Outlook for markets</strong>
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<br>The aftermath of the Brexit vote could see more volatility in shares in the short term. However, beyond near term uncertainties, we still see shares trending higher this year helped by relatively attractive valuations, ultra easy global monetary conditions and continuing moderate global economic growth.</div>
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<br>Lower and lower bond yields point to a soft medium term return potential from them, but it’s hard to get too bearish in a world of fragile growth, spare capacity, low inflation and ongoing shocks like Brexit. That said, the recent bond rally has taken bond yields to ridiculously low levels leaving them at risk of a sharp snapback at some point.</div>
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<div class="column">Commercial property and infrastructure are likely to continue benefitting from the ongoing search for yield by investors.</div>
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<br>Capital city dwelling price gains are expected to slow to around 3 percent over the year ahead, as the heat comes out of Sydney and Melbourne thanks to toughening lending standards and pockets of oversupply. Prices are likely to continue to fall in Perth and Darwin, but price growth may be picking up in Brisbane.</div>
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<br>Cash and bank deposits offer poor returns.</div>
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<br>While the Brexit outcome knocked the $A lower, it’s still higher than it should be and the longer term downtrend looks likely to continue as the interest rate differential in favour of Australia narrows as the RBA continues cutting and the Fed eventually resumes hiking, commodity prices remain in a secular downswing and the $A sees its usual undershoot of fair value. The $A is still likely to fall to around $US0.60 in the years ahead.</div>
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<br>Eurozone shares lost 8.6 percent on Friday night and the US S&amp;P 500 lost 3.6 percent in response to the Brexit vote. However, since the Australian share market largely responded to the Brexit outcome on Friday, ASX 200 futures actually rose 3 points or 0.1 percent indicating a basically flat start to trade for the Australian share market on Monday.</div>
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<div class="column"><em><span><a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author" target="_blank">SHANE OLIVER</a></span> is head of investment strategy and economics and chief economist at <a href="https://www.ampcapital.com.au/home" target="_blank">AMP Capital</a> and is responsible for AMP Capital's diversified investment funds.</em></div>
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Britain's EU vote in perspective and the Australia election: Shane Oliver

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<p><span>GUEST OBSERVER</span></p>
<p><span>Sales activity and price growth in the prime London residential market have both slowed since mid-2014. The EU referendum has been only one of a number of headwinds which have impacted the market. </span></p>
<p><span>The UK election, the threat of a Mansion Tax, the imposition of higher rates of stamp duty as well as the additional rate for investors and second home buyers, have all conspired with the EU vote to dampen market sentiment. </span></p>
<p><span>The very strong volume of sales seen at the end of Q1, bolstered by the impending </span>additional rate of stamp duty, was bound to weigh on deal levels in Q2, but it is fair to speculate that at least part of the decline since April has related to market uncertainty caused by the referendum.</p>
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<p><span>There is no doubt that the vote in favour of Brexit will generate a period of renewed uncertainty in the prime London residential market. Some demand, especially from investors, will be delayed and in some cases redirected to other markets – although the significance of these trends should not be overstated. </span></p>
<p><span>Demand for prime London property rests on a wide range of drivers – most of which are unaffected by the referendum decision: the scale of London’s business cluster, depth of skills, education, lifestyle and language. It is not easy to identify an obvious alternative destination for investors despite short-term nervousness. </span></p>
<p><span>On the eve of the vote the pound sat 14% below its mid-2014 peak meaning pricing in the prime market was more attractive for dollar buyers. While a further weakening </span>of the pound could increase inward investment, this impact will be constrained by the fact that around 80 percent of central London buyers are UK residents.</p>
<p><span>It seems a reasonable assumption to make that interest rates will be lower for longer, despite the risk of imported inflation from a weaker pound. While the long-term benefit of ultra-low interest rates on the housing market may be questionable, in the short- term they will act to underpin demand especially for equity rich buyers with access to the best funding rates. </span></p>
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<p><span>The prime country house market will be similarly impacted by the result. However while the market has performed relatively well over recent years, following a slow recovery immediately after the financial crisis, prices have not tracked London to date and there is scope for some out- performance in the short to medium term. </span></p>
<p><span>While we are entering a period of renewed uncertainty in the UK and London market, ongoing issues around EU and especially Eurozone stability, which will be highlighted in the run up to French and German elections, are likely to counter this risk and shore-up London’s safe- haven appeal. </span></p>
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<p><span><em>Liam Bailey is partner, Global Head of Research for Knight Frank and can be contacted <a href="https://www.knightfrank.com/research" target="_blank">here</a>.</em></span></p>
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The factors dampening UK residential market sentiment: Knight Frank's Liam Bailey

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<p><span>GUEST OBSERVER</span></p>
<p><span>Brexit has delivered a shock to global financial markets. </span><span>Australia’s </span><span>markets have, however, seen much smaller moves than elsewhere, particularly in Europe. </span></p>
<p><span>This partly reflects that commodity prices have held up well, with the iron ore price above its pre-Brexit referendum level. The AUD is down from USD0.76 to USD0.74, but the fall in the AUD is largely explained by strength of the USD. </span></p>
<p><span>The market</span><span>’s </span><span>reaction seems consistent with the apparent limited economic significance of the UK for Australia. Britain </span><span>takes only 2.8 percent of Australia’</span><span>s exports and, although financial connections are larger, recent net capital inflows to Australia have mostly come from </span><span>Asia. In short, Australia’</span><span>s economic story is much more about Asia than about Britain or Europe. To the extent that Brexit affects Australia, it is mostly through an impact it could have on growth in Australia's major trading partners in Asia. We see Brexit as unlikely to trigger a cash rate cut from the RBA this month. </span></p>
<p><span>Locally, economic focus will shift to the federal election this weekend (2 July), with current polling suggesting a tight race. The latest </span><span>Newspoll </span><span>show the Coalition slightly ahead, at 51:49 on a </span><span>‘</span><span>two-party preferred basis</span><span>’</span><span>, although a 2pt lead is within the margin of error. We see the election as unlikely to have market implications, although the desire to be apolitical could explain the central bank</span><span>’</span><span>s recent reluctance to give much policy guidance (see </span><span>Australian Election Observer</span><span>, 17 June 2016). </span></p>
<p><span>More generally, Au</span><span>stralia’</span><span>s growth remains strong, business conditions are at high levels, jobs growth has continued and house prices are rising. Last weeken</span><span>d’</span><span>s consumer confidence and housing auction clearance rates remained high, despite the Brexit vote. We expect continued solid growth, although inflation remains low. </span></p>
<p><span>W</span><span>e continue to see the RBA’</span><span>s next potential trigger as the Q2 CPI print, due on 27 July. Our central case sees a 25bp cash rate cut in August, after a low CPI print. </span></p>
<p><a href="/images/2016/07/01/Screen%20Shot%202016-07-01%20at%2010.06.02%20AM.png" target="_blank"><span>Click to enlarge</span></a></p>
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<p><span>What does ‘</span><span>Brexit</span><span>’ </span><span>mean for Australia? </span></p>
<p><span>Brexit has had a large impact on global financial markets, although the local effect has been smaller than elsewhere. </span><span>Australia’</span><span>s equity market sold off only modestly and the AUD has fallen, but the decline can be fully explained by strength of the USD rather than weakness of the AUD. Commodity prices have held up well, with the Bloomberg commodity price index broadly unchanged since prior to the Brexit vote and up 13% year-to-date. Iron ore prices have risen since the Brexit vote. </span></p>
<p><span>The more limited local market impact reflects the relatively small economic significance of the UK to Australia. The UK only accounts f</span><span>or 2.8% of Australia’</span><span>s exports (Chart 2). The rest of the European Union accounts for 4.6</span><span>% of Australia’</span><span>s exports, so a wider effect of Brexit on Europe could be more significant. However, this event would only be a big deal for Australia if it significantly affects Asia, as 74% </span><span>of Australia’</span><span>s exports go to Asia.</span></p>
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<p><span>Although trade linkages are small, Australia has more significant financial exposures to the UK. The UK accounts for 16% of the stock of foreign investment in Australia and a similar share of Au</span><span>stralia’</span><span>s investment abroad is in the UK. The UK accounts for 11% of Australian-owned banks</span><span>’ </span><span>offshore exposures on an ultimate risk basis. However, much of the recent growth in capital inflows into Australia has been coming from growing links to Asia (Chart 2). </span></p>
<p><span>For the RBA, it is likely that the comparatively muted local financial market response to Brexit and the small trade linkages to the UK are the most important elements for monetary policy. The other key issue will be </span><span>the effect that the UK’</span><span>s recent, post-Brexit vote, sovereign rating downgrade could have on the AUD. S&amp;P has downgraded the UK by two notches, from triple-A to AA. Australia retains a triple-A rating, and is one of only nine countries with a triple-A rating from all three major rating agencies. </span><span>Australia’</span><span>s strong rating could put unwanted upward pressure on the AUD at a time when a competitive currency is needed to support growth. </span></p>
<p><span>Local growth is strong and housing prices are rising </span></p>
<p><span>On the latest readings local growth has remained solid running into Q2, following the strong GDP print for Q1 (1.1% q-o-q). Surveyed business conditions remained at around post-global financial crisis highs in June and capacity utilisation has recently also picked up strongly (Chart 3 and 4). Should the lift in capacity utilisation prove persistent, it may be expected to motivate non-mining firms to ramp up their investment plans, which is a much needed next stage of the rebalancing of growth following the end of the mining investment boom. </span></p>
<p><span>The lift in capacity utilisation and business conditions also helps to explain continued jobs growth in recent months. Employment growth is running at around 2.0% y-o-y, which has been </span>enough to keep the unemployment rate steady at around 5.7% in the past couple of months (Chart 5).</p>
<p>As activity has picked up, local firms have, so far, been choosing to take on more labour, rather than increase investment to meet demand. At some point, they may start to need to increase investment to support a continued pick-up in local production. The improvement in the labour market may also, at some point, start to put some upward pressure on wages growth, which could lift local inflation.</p>
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<p><span>For the RBA, another factor that could discourage a near-term cash rate cut is the recent re- acceleration of house price growth (Chart 6). Housing prices rose by 8% y-o-y in June (based on daily data), up from a rate of 6% y-o-y in March. However, given that loan approvals have been weaker recently, housing supply is coming online and the prudential settings remain tight, we expect that housing price growth will slow in coming quarters (for more on this see </span><span>Downunder Digest: Australian housing is still set to cool</span><span>, 21 June 2016). Nonetheless, the RBA may want a bit more evidence that the re-acceleration does not persist before cutting again.</span></p>
<p><a href="/images/2016/07/01/Screen%20Shot%202016-07-01%20at%2010.09.59%20AM.png" target="_blank"><span>Click to enlarge</span></a></p>
<p><span><img src="/images/2016/07/01/Screen%20Shot%202016-07-01%20at%2010.09.59%20AM.png" alt=""></span></p>
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<p><span>The Q2 CPI print on 27 July is all important </span></p>
<p><span>Although we expect the RBA to be on hold on 5 July, our central case is for a 25bp cut on 2 August. This view depends on the Q2 CPI print, which is due on 27 July. Keep in mind, the almost singular motivation for the cash rate cut in May, was the significant downside surprise to the Q1 CPI print, which pushed underlying </span><span>inflation to well below the RBA’</span><span>s 2-3% target band (Chart 7). On a q-o-q and y-o-y basis, the first quarter underlying inflation print was the lowest result since inflation targeting began in 1993 (Chart 8). </span></p>
<p><a href="/images/2016/07/01/Screen%20Shot%202016-07-01%20at%2010.11.30%20AM.png" target="_blank"><span>Click to enlarge</span></a></p>
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<p><span>In our view, if the Q2 print shows underlying inflation below the bottom edge of the 2-3% target band on a quarterly basis, that is, below 0.5%, we see the RBA as likely to cut in August. As our current forecast is for the average of trimmed mean and weighted median to be 0.45%, our central case is for the RBA to cut in August. A higher print will make a cut less likely, although much will then depend on other economic developments. </span></p>
<p><span>Australia’s </span><span>election has little bearing on the RBA </span></p>
<p><span>Australia will hold a federal election on 2 July. The latest </span><span>Newspoll </span><span>shows the current Liberal/National coalition, led by Prime Minister, Malcolm Turnbull, slightly ahead of the Labor Party, led by </span><span>Bill Shorten, at 51:49 on a ‘two</span><span>-</span><span>party preferred basis’</span><span>, although a 2pt lead is within the margin of error. Perhaps more interestingly, the Coalition is currently leading in more of the marginal electorates. All in all, however, the polls suggest it will be a tight race. </span></p>
<p><span>The market implications of the election are expected to be limited. Neither major party is proposing radical reforms. Both major parties agree on the fundamental economic framework, supporting a floating currency, independent central bank, free flow of capital and trade. For more on the economic policies of each party, see </span><span>Australian Election Observer</span><span>, 17 June 2016. </span></p>
<p><span>For the RBA the election is unlikely to make any difference to its approach to policy. However, on the margin, a desire to remain apolitical may help to </span><span>partly explain the central bank’</span><span>s reluctance to provide much guidance in its recent statements. Keep in </span><span>mind that the RBA’</span><span>s recent statements have not included an explicit easing bias. </span></p>
<p><span>We expect the RBA’</span><span>s post-meeting statement to note that the board is waiting for more information, particularly on prices, thus suggesting that the Q2 CPI print will be of key focus for the RBA in determining its next move.</span></p>
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<p><span> <em><a href="https://www.about.hsbc.com.au/hsbc-in-australia/management-team" target="_blank">PAUL BLOXHAM</a> IS CHIEF ECONOMIST (AUSTRALIA AND NEW ZEALAND) FOR HSBC. </em></span></p>
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Brexit unlikely to trigger a cash rate cut from the RBA in July: HSBC's Paul Bloxham

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<p>GUEST OBSERVER</p>
<p>The UK has long been a destination for Asian real estate investors, with the attraction of the strong liquidity, stable governance, transparency and clear title, meaning that investors from China, Hong Kong, Singapore, Malaysia and Thailand have all invested in bricks-and-mortar in the country.</p>
<p>With the decision to exit the European Union, for existing Asian property owners, the fall in the pound will impact the repatriation of any income returns, as well as the gains on any disposal.</p>
<p>Although there is likely to be more volatility in the market, ultimately most investors are looking to the long term – so will continue to hold their assets, in the hope that any short-term instability will eventually subside when more clarity of the UK’s role in Europe is determined.</p>
<p>The decision, however, could also present a buying opportunity, as the significant drop in the value of the pound, as in 2009, could lead to an uptick of interest by Asian investors, who, over the last few months have adopted a wait-and-see approach to the referendum – and will now see their buying power increase significantly.</p>
<p>Chinese, Singaporean and Hong Kong investors especially, looking at both residential and commercial properties – most likely in London – will be monitoring the market carefully and looking for opportunities to potentially increase their exposure over the coming weeks and months.</p>
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<p><em>Nicholas Holt is head of research for Asia Pacific, Knight Frank and can be contacted <a href="https://www.knightfrank.com.au" target="_blank">here</a>.</em></p>
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London lure for Asian real estate investors: Knight Frank's Nicholas Holt

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<p><span>GUEST OBSERVER</span></p>
<p><span>Britain’s vote to leave the EU on 23rd June 2016 and the subsequent political and constitutional turmoil that followed in its wake, introduced a very large dose of uncertainty into investment markets not only in the UK and the EU, but globally and so changed both the sum total and distribution of risk dramatically. </span></p>
<p><span>While some markets have realised that this perception of risk was overdone in certain sectors, and have recovered markedly, others remain subdued or have rallied only moderately. Some markets such as gold, the Yen and US dollar have strengthened signi cantly while Sterling, Euros and UK stocks, particularly REITs and construction, are still down (see Figure 1). </span></p>
<p><span>Unlike these assets, there is no real- time trading data in directly owned real estate so it will not be possible to precisely assess the impact of Brexit in either pricing or turnover terms </span>for at least a few months but it is possible to look at the characteristics of property against other assets to begin to understand its potential positioning.</p>
<p><a href="/images/2016/07/29/Screen%20Shot%202016-07-29%20at%208.51.35%20AM.png" target="_blank">Click to enlarge</a></p>
<p><img src="/images/2016/07/29/Screen%20Shot%202016-07-29%20at%208.51.35%20AM.png" alt=""></p>
<p><span>To do this, we consider in this note not only the key qualities of real estate in relation to other asset classes but also the relative position of different geographies. The following sections look at real estate in relation to: </span></p>
<p><span>1. Interest rates<br> 2. Exchange rates<br> 3. Geopolitical and cyclical risk </span></p>
<p><span>The key themes that emerge are: </span></p>
<p><span>Globally, real estate will increasingly be sought after as an income-producing investment, with decreasing emphasis on capital growth, particularly where bond yields are low or have even turned negative. </span></p>
<p><span>The role of property in providing a safe store of wealth in ‘safe haven’, secure title, jurisdictions will come to the fore although this will be tempered by currency risk in places where currency may move down further against the investor currency. </span></p>
<p><span>A focus on real estate occupier fundamentals, and their impact on rental returns and prospects for rental growth, is inevitable and may present investment opportunities over coming months. </span></p>
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<p><span>Buying opportunities will be most apparent for those with large war-chests and in dollar- denominated or Yen currencies who were already waiting for cyclical buying opportunities in some fully valued markets. This activity will </span>be tempered by fear of economic downturns but, again, the longer- term nature of real estate investment will come to the fore.</p>
<p><span>Leveraged investors will be less prominent and opportunistic and unconventional investors with cash will be the most active globally. This may mean a larger proportion of private investors once again active in the market.</span></p>
<p><a href="/images/2016/07/29/Screen%20Shot%202016-07-29%20at%208.52.48%20AM.png" target="_blank"><span>Click to enlarge</span></a></p>
<p><span><img src="/images/2016/07/29/Screen%20Shot%202016-07-29%20at%208.52.48%20AM.png" alt=""></span></p>
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<p><span>Interest rates and yields </span></p>
<p><span>In the face of rising global risk (and in the expectation of Bank of England base rate cuts), there appears to have been a ight to safety in the form of government bonds. At the end of June, the UK joined Japan and Germany in experiencing short-term negative bond rates (see Figure 2). </span></p>
<p><span>Expectations before the referendum were that UK and US base rates would start to move out in the near future. Fears in some fully valued markets were that rental growth would not keep pace. With expectations once again that base rates will stay lower for longer, or even drop, property yields have longer to move out and are more likely to do so through rental growth rather than capital contraction. </span></p>
<p><span>When the opportunity cost of money turns negative, any income- producing asset must start to have particular attractions. This potentially puts real estate into a new and different class for as long as the majority of tenants continue to pay rent. Under these circumstances, we expect fully let properties of all use types and classes with low void rates in deep markets to remain an essential part of any well-balanced investment portfolio. </span></p>
<p><span>However, we expect this also means that the fundamentals and the future prospects of both the market and the property will be carefully scrutinised by investors before purchase.</span></p>
<p><a href="/images/2016/07/29/Screen%20Shot%202016-07-29%20at%208.53.52%20AM.png" target="_blank"><span>Click to enlarge</span></a></p>
<p><span><img src="/images/2016/07/29/Screen%20Shot%202016-07-29%20at%208.53.52%20AM.png" alt=""></span></p>
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<p><span>When the world is searching for income, investors are likely to be looking for both quality AND value. </span></p>
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<p><span>Exchange rates </span></p>
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<p><span>UK and European property has become signi cantly cheaper for US dollar and related currencies and especially for holders of Japanese Yen. </span></p>
<p><span>We do not think these currency changes will give every dollar buyer a desire to buy UK and European real estate but it does mean that investment buyers will become increasingly focused on the fundamentals of yield levels and rental growth prospects. Real estate will look good value where these are present, particularly as expectations of more global volatility rise. The world is faced with further UK, US and European political change and elections, to cite just one element of risk, for example.</span></p>
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<p><span>The credit rating of the UK was instantly downgraded on the 24th June when the referendum results were known and sterling plummeted against most other currencies, </span>even the euro which also suffered devaluation against the US dollar.</p>
<p><span>Currency volatility has added to the risks of placing investments in Euros or sterling for the moment but also offers opportunities for those holding US dollars, other dollar- pegged currencies and Yen to buy assets more cheaply. Figure 3 shows how currencies have moved since the eve of the referendum. </span></p>
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<p><span>UK and European property has become significantly cheaper for US dollar and related currencies and especially for holders of Japanese Yen. We do not think these currency changes will give every dollar buyer a desire to buy UK and European real estate but it does mean that investment buyers will become increasingly focused on the fundamentals of yield levels and rental growth prospects. Real estate will look good value where these are present, particularly as expectations of more global volatility rise. The world is faced with further UK, US and European political change and elections, to cite just one element of risk, for example. </span></p>
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<p><span>Geopolitical and cyclical risk</span></p>
<p><span>Long before the Brexit vote, some degree of geopolitical risk related to the Eurozone seems to have already been priced into European real estate markets. Prime of ce investors at the end of last year, for example, were buying London on the same level of net effective yield, adjusted for bond rates, as other major world cities like New York and Hong Kong while Eurozone cities such as Paris, Frankfurt and Brussels had not seen the same degree of yield compression and some were being priced on the same risk-adjusted net effective yields as Chengdu and Manila (see Figure 4). </span></p>
<p><span>Yields have since moved in signi cantly in many European cities but some global investors' appetite for Euro denominated assets in a region of political uncertainty may have been somewhat impaired compared to other world regions. Global markets appear to think that the EU is not out of the woods yet. </span></p>
<p><span>Conclusion </span></p>
<p><span>In the very early days of global post Brexit reaction, and indeed in the days preceding it, stock market volatility has increased dramatically. Meanwhile, yields on lower-risk government bonds – even UK ones, have moved in, not out since the referendum. The search for safety is still on and the prospects for negative interest rates seems to have increased. </span></p>
<p><span>There is still appetite from global investors to put their money somewhere. It is becoming increasingly difficult to nd asset classes and sectors which offer stable incomes and stability or safe </span>haven status. The price of gold, for example, rose by 6.4%, from US$1,253/ounce to US$1,333 over the four days to June 27th. Some other real assets, particularly real estate, may look only slightly less attractive to certain investors, particularly those seeking income as well as diversi cation.</p>
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<p><span>There is a point, especially in countries with negative interest rates, like Japan, when the yield available from real estate in countries with secure tenure and socially </span>safe environments and transparent markets looks compelling, despite increased risk and volatility. This is especially the case for cash investors seeking mid and long-term income streams. Recent currency strength, especially if it is expected to be temporary, makes the purchase of sound Sterling or Euro denominated rental income look cheap.</p>
<p><span>While expectations of economic growth may be receding in certain quarters, some cities and some countries are likely to do better than others and it is the most stable, high yielding sectors in safe jurisdictions that investors will increasingly be looking for. </span></p>
<p><span>Performance will be found, as always, in real estate locations where there is steady demand from growing populations, security of title, market transparency, limited supply plus long-term economic and growth prospects. Investors are likely to be looking for all these quality factors but looking for value too in the form of higher yields. Returns will be further enhanced in places where the currency strengthens over time so that income returns to foreign currency investors are improved. </span></p>
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<p><em>Yolanda Barnes is director, World Research at Savills and can be contacted <a href="https://www.savills.com" target="_blank">here</a>.</em></p>
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The Brexit impact on global real estate: Yolande Barnes

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<div>GUEST OBSERVER </div>
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<p>There is no doubt that the vote in favour of Brexit will generate a period of renewed uncertainty, but mainly in the UK and Europe. Some demand, especially from investors and businesses (hiring and investing), will be delayed and in some cases redirected to other markets.</p>
<p>Demand for Australian property may actually benefit (as a safe haven) as globalinvestors pause in directing capital into Europe and our demand rests on a wide range of drivers – most of which are unaffected by the referendum decision: the scale of Australia’s business clusters, depth of skills, education, lifestyle and language etc. </p>
<p>However it must be said that the world is entering a period of renewed uncertainty inthe UK and London market, and ongoing issues around EU and especially Eurozone stability, which will be highlighted in the run up to French and German elections. Uncertainty and instability is bad for financial markets and capital investment, so let’s see what impact it may have on borrowing costs and business/consumer confidence here in Australia. </p>
<p>The UK has long been a destination for Asian (Chinese mainly) real estate investors, with the attraction of the strong liquidity, stable governance, transparency and clear title. With the decision to exit the European Union, for existing Asian property owners, the fall in the pound will impact the repatriation of any income returns, as well as the gains on any disposal.</p>
<p>Although there is likely to be more volatility in the market, ultimately most investors are looking to the long term – so will continue to hold their assets, in the hope that any short-term instability will eventually subside when more clarity of the UK’s role in Europe is determined.</p>
<p>The decision, however, could also present a buying opportunity for owners not already set, as the significant drop in the value of the pound, as in 2009, could lead to an uptick of interest by Asian investors, who, over the last few months have adopted a wait-and-see approach to the referendum – and will now see their buying power increase significantly.</p>
<p>As stated above, Chinese, Singaporean and Hong Kong investors especially, looking at both residential and commercial properties, could also start to look even harder at markets like Australia over the remainder of 2016 until the dust settles in UK/Europe.</p>
<p>Regarding interest rates, an interest rate cut of 25 basis points is a strong possibility at the UK Monetary Policy Committee’s July meeting, or perhaps earlier if required. We may also see a return of quantitative easing, if there are signs that investment is deteriorating. I think the RBA is now even more likely of cutting rates, either in July or more likely in August once the inflation number comes through.</p>
<p>Uncertainty for businesses is the biggest threat to Australia in a very global world. It is therefore inevitable that business behaviour will be stifled over the short-term and delays in occupier decision making will persist. </p>
<p>Despite this, over the medium-term there are reasons to be positive. First, the pessimistic scenarios highlighted during politicised campaigns often fail to emerge. Second, as the dust settles, and the UK and global economy stabilises, businesses will reconnect with the fundamental qualities of Australia as a business location; ranging from corporate tax rates, to the large consumer market, to the highly skilled worker base, to the lifestyle.</p>
<p><em>Matt Whitby is Head of Research &amp; Consulting, Australia, Knight Frank and can be contacted <a href="https://www.knightfrank.com.au" target="_blank">here</a>.</em></p>
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Potential impact of Brexit in Australia: Knight Frank's Matt Whitby

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<p><img src="https://counter.theconversation.edu.au/content/57114/count.gif" alt="The Conversation" width="1" height="1"></p>
<p>GUEST OBSERVER</p>
<p>I have been analysing and forecasting economies since I worked in our Treasury in the late 1960s.</p>
<p>Over that time, I have fortunately been able to predict most of the key economic developments and events in the global and in our domestic economy – stagflation, recessions, stock and property market crashes, the Asian crisis, the tech-wreck, the global financial crisis (GFC), and so on. Yet it is much harder today to assess where to next than at anytime over that period.</p>
<p>Many of the economic relationships, that many have come to take for granted, seem to have broken down. To cite just one example, the view that if the world was flooded with liquidity, we’d not only stimulate significant real activity, but soon experience runaway inflation. Yet since the GFC, with massive “quantitative easing” (keeping interest rates low, mostly near zero, or even negative) in the US, Europe, Japan and recently China, there is still a significant risk of deflation, and the real economy, especially business investment, hasn’t really responded.</p>
<p>Europe is struggling to avoid a triple-dip recession with deflation, a risk now seriously enhanced with the Brexit vote. The US recovery seems to be faltering with the Federal Reserve threatening to raise interest rates, which could not only slow US growth, but precipitate further turmoil in emerging economies, in their stockmarkets and in their currencies.</p>
<p>Japan is still stuck in decades of rolling recessions and deflation. China’s growth is closer to 4-5 percent, much lower than the authorities would have us believe. It also has a host of structural issues – economic transition, demographic forces, aggregate debt, bad bank and non-bank loans, inequality, corruption and pollution – coming to the fore. And most emerging economies are in deep recession.</p>
<p>All these economic policy challenges are being overlaid, and further complicated, by mounting political and market volatility. This includes serious structural demographic trends like ageing and mass migration, a host of increasing geopolitical tensions, and the significant challenge of climate change to achieve net zero emissions by 2050.</p>
<p>All up, world growth forecasts by most global and regional forecasters are being downgraded consistently. It is clear that the world will have to live with lower growth for many years to come. Most commodity prices are predicted to remain subdued, and world trade will remain particularly weak, having collapsed by some 14% last year.</p>
<p>Moreover, global policy authorities have almost exhausted their traditional monetary and fiscal policy capacity and flexibility, and now must face enormous political and institutional constraints that are working against genuine structural reform. It also seems that polls and betting odds are no longer a reliable guide to the “feelings of the masses”.</p>
<p>Some of the political forces at work are also of particular concern. For example, the recent Brexit vote revealed just how easily sound economic arguments can be overtaken by fear and emotion, driven mostly by misrepresentation and exaggeration, ignorance, and prejudice.</p>
<p>The outcomes could include a disunited kingdom, a fragmentation of Europe (still the world’s second largest economy) putting the Euro under real strain, and a UK, if not global, recession. We have seen a significant, and most disturbing, increase in anti-immigration sentiment across Europe, manifesting in significant political movements.</p>
<p>Equally, the US political system has been turned on its head by the emergence of Donald Trump, running his anti-immigration, anti-China, anti-freer trade, anti-globalisation agendas.</p>
<p>These and many other political forces could easily serve to stall, if not work to reverse, the significant economic progress made globally since the second world war, by integrating the world economy with the freer flow of goods, capital and people.</p>
<p>In my experience, the world has not faced a more challenging time, with such limited policy alternatives and capacities, and with little or no historical experience on which to draw.</p>
<p>Australia has just endured one its longest and most boring election campaigns, with little more than a passing reference to some of these challenges, but certainly no genuine recognition of their significance to the policy challenges our governments now face domestically.</p>
<p>These global conditions and challenges are of such significance that it could so easily swamp anything that was said or promised by any of the parties in this campaign.</p>
<p>The need for inspired leadership in our country has rarely been greater. We saw no evidence of it in this campaign. The outcome will be more uncertainty, less stability, and even poorer government, at this most challenging time.</p>
<p><span class="fn author-name">John Hewson is p</span>rofessor and chair, Tax and Transfer Policy Institute, Crawford School, Australian National University and author for The Conversation. He can be contacted <a href="https://theconversation.com/profiles/john-hewson-16192" target="_blank">here</a>.</p>
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