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Title : Recession chances receding as business gains momentum and deficit shrinks
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Recession chances receding as business gains momentum and deficit shrinks

First, the good news. Gerard Minack, one of the most astute, if bearish, of market strategists has significantly dialled down his odds of an Australian recession next year.

The week ahead:

• MYEFO release expected to show budget $4bn better off than original forecast (Monday)
• RBA minutes no change, rates on hold for a long time (Tuesday)
• Trump tax reforms expected to be passed by U.S. senate (Tuesday)

The bad news?

"Australia seems set for another year of desultory growth, avoiding a statistical recession but experiencing per capita pain," Mr Minack said.

However, that is positively upbeat compared to his half-year report card on the Australian economy.

"Six months ago I was very gloomy about the outlook for Australia in 2018," he said.

"My base case was weak growth, but I saw a one-in-three chance of recession, and almost no upside risk."

Mr Minack said the recession risk was now, "probably no higher than 20 per cent".

Mr Minack made his name as one of Wall Street's leading strategists with the big investment bank Morgan Stanley, before setting up shop in Sydney with his own eponymous, boutique advisory business, Minack Advisors.

He famously predicted Wall Street and ASX were well primed to halve in value well before the GFC broke in late 2007.

Mr Minack argued on one hand a fading housing sector and weak wages remained headwinds to the economy, while improved corporate sentiment may mean things turn out better than expected.

"But the most likely outcome is unchanged monetary policy, moderate Australian dollar declines and domestic equities continuing to lag global markets," he said.

The negatives:

• Wages: likely to remain weak because while employment growth is solid, under-employment is high and that will see disposable income flatline
• Housing: a slowdown will not support growth, while the impact of potential falling house prices on net wealth and spending could be serious
• Commodity exports: the spike in commodity prices may have peaked

The positives:

• Corporate sentiment: still near record highs and likely to lead to more jobs
• Business investment: appears to have turned the corner with the great mining capex bust having run its course, and non-mining investment is now rising

The wildcard for the recession scenario is a steeper-than-expected fall in house prices.

"The big, double-barrelled uncertainty, however, is wealth effects: both, how far house prices fall, and how any fall will affect household saving," Mr Minack said.

"I expect single-digit house price declines next year but it's not clear how such a wealth setback will affect saving.

"Recession is not my base case, but is a risk if there is an out-sized consumer reaction to falling house prices," he said.

The other buffer against a shrinking economy is Australia's solid population growth.

"It's difficult to have a statistical recession when population growth is running at 1.5-to-1.75 per cent — even if trend-per-capita income growth is weaker now than the period that included the 1990s recession."

Budget surplus to narrow

Just how much things have turned around since Mr Minack's gloomier view six months ago is likely to be reflected in the Federal Government's Mid-Year Fiscal and Economic Outlook (MYEFO).

The punditry suggests the deficit should narrow from the $29.4 billion forecast in the May budget to around $26 billion.

The improvement can be attributed to a generally stronger-than-expected global economy driving stronger commodity prices and a windfall from corporate tax receipts, while better-than-forecast unemployment results should keep a lid on welfare payments.

Operating in the opposite direction are slower wage growth and consumption dragging treasury revenues down.

A roughly 10 per cent narrowing in the projected deficit this year should provide a platform for Treasurer Scott Morrison to remain upbeat in his promise to deliver a surplus, or at least a balanced budget, by 2021.

UBS chief economist George Tharanou said the strongest starting point suggests the cumulative deficits — over the forecast profile of the four years to 2020/21 — could also be better by around $10 billion.

Mr Tharanou is not so bullish on Mr Morrison's plans to slash government debt.

"However, for total public sector gross debt we don't expect as much improvement," Mr Tharanou said.

NAB's Ivan Colhoun said the Government's policy priority remains to negotiate through the Senate the company tax cuts.

Those cuts are intended to help businesses with more than $50 million a year in annual turnover, but Mr Colhoun said there is increasing political pressure to announce some modest income tax cuts ahead of the next election as well.

Mr Morrison may look at a fiscal window opening and cut and run, but that will be for another day.

For the markets, with little in it to suggest a downgrade from the credit rating agencies, MYEFO may well be a bit of one-day wonder.

"Bottom line, budgets rarely have a significant impact on Australian markets," Mr Colhoun said. He could have added, MYEFOs even less so.

Wall St higher on tax hopes

However, if Wall Street's close is anything to go by, markets certainly take notice of big tax changes.

Markets on Friday's close:

• ASX SPI 200 futures +0.5pc at 6,037, ASX 200 (Friday's close) +0.2pc at 6,011
• AUD: 76.44 US cents, 65.02 euro cents, 57.37 British pence, 86.07 Japanese yen, $NZ1.09
• US: Dow Jones +0.6pc at 24,651, S&P500 +0.9pc at 2,676, NASDAQ +1.2pc at 6,937
• Europe: FTSE +0.6pc at 7,491 DAX +0.3pc at 13,104 Euro Stoxx50 +0.1pc at 3,561
• Commodities: Brent oil -0.1pc at $US63.23/barrel, Gold +0.2pc at $US1255/ounce, Iron ore -0.9pc at $US69.94

All three key indices climbed to fresh records on indications that while the Republicans may not be totally unified, there were enough votes to get the tax bill over the line next week.

ASX trading over the weekend was buoyed by this and looks set for a sprightly opening session.

If everything goes to plan for Mr Trump, his tax bill will clear the House on Tuesday and the Senate on Wednesday.

Waiting in the congressional wings is the prospect of a partial government shutdown just before Christmas as the Government hits its spending limits.

A deal authorising another $US700 billion in defence spending is expected, otherwise it will be a less-than-merry Christmas for US public servants.

Wall Street is unlikely to be too concerned as, perhaps oddly, traders tend to turn a blind eye to US administrations running out of money.

Friday's surge kicked US share prices almost 1 per cent higher over the week, while the ASX was relatively flat. Europe and Japan had poor weeks, both down around 1 per cent, while China slipped 0.6 per cent.

Oil hung near a two-year high, but sentiment is weaker with forecasts from the International Energy Agency that a step up in US shale oil production could push the market back into surplus, just as the glut was starting to drain.

The spot price of iron slipped a bit, although futures contracts edged up on news that steel stockpiles were now at the their lowest level since 2011.

However, the feeling is the good times for steel may be over once the winter production cuts are lifted, prices may slip once again.

Statisticians pack up for Christmas

The data front is fairly quiet leading up to Christmas.

Indeed, there is now not much macro-fodder to ruminate on until well into January.

In the US there is bundle of housing figures, GDP and a key inflation measure, while Europe's attention is likely to be captured by the Catalan election (Thursday) where the separatist parties are just ahead in the opinion polls.

The RBA minutes (Tuesday) will tell us nothing we don't already know. As the RBA's former boss Glenn Stevens would advise, everyone should chill and head to the beach for summer.

Australia

Date	Event	Forecast
Monday 18/12/2017	MYEFO	Budget deficit should narrow to around $25bn
	New motor vehicle sales	Nov: Still strong, but flat
Tuesday 19/12/2018	RBA minutes	Notes from last meeting where rates were kept on hold
	ANZ AGM	ANZ has dodged much of the controversy surrounding others
Wednesday 20/12/2017	Cashless retail sale	Nov: NAB survey, may give an early insight into Christmas retail conditions
	Skilled vacancies	Nov: Edged up in October. Improving investment sentiment likely to see another rise
Thursday 21/12/2017	Dulux AGM	Shareholders should be happy, commentary on housing will be interesting
	Incitec Pivot AGM	Energy costs always a focus of company and shareholder concerns
Friday 22/12/2017

Overseas

Date	Event	Forecast
Monday 18/12/2017	CH: Property prices	Nov: Have been cooling in major cities as tighter credit bites
	EU: Inflation	Nov: Still very weak, core CPI less than 1pc YoY
	US: Housing market index	Dec: Flat result expected
Tuesday 19/12/2018	EU: Labour costs	Q3: Flat, just like most developed economies
	US: Current account balance	Q3: Still a big deficit, may narrow a bit to $US115bn
	US: Housing stats	Nov: Building permits and housing starts, both likely down after a big October jump
Wednesday 20/12/2017	EU: Current account balance	Q3: Still in surplus
	US: Existing home sales	Nov: May tick up again
Thursday 21/12/2017	JP: BoJ rates decision	Balance rate holding at -0.1pc, 10-year rate at zero.
	US: GDP	Q3: Economy growing at around 3.3pc YoY
	EU: Catalan elections in Spain	Separatists haves their noses in front
Friday 22/12/2017	UK: GDP	Q3: Economy growing at around 1.5pc YoY
	US: Inflation	Nov: The Fed's preferred measure still below target at +1.5pc YoY

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