Blog

Tue, 26 Jul 2016  |  

This article first appeared on the Yahoo7 Finance website at this address: https://au.finance.yahoo.com/news/get-set-for-a-august-interest-rate-cut-045119121.html 

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Get set for an August interest rate cut

Get set for a further interest rate cut on 2 August, which is the date of the next meeting of the Board of the Reserve Bank of Australia. With the economy expanding at a moderate pace, at best, with the unemployment rate appearing to edge up and global economic conditions only fair, the case for a 25 basis point rate cut, to a fresh record low of 1.5 per cent, is solid. It will, nonetheless, be the inflation data next Wednesday that will help to lock in the case for lower rates.

Based on available information, inflation is set to rise by 0.8 per cent in the June quarter, which will leave annual inflation at 1.4 per cent. During the June quarter, there was a sharp lift in petrol prices driven by the jump in global oil prices. This alone will account for around 0.25 percentage points of the 0.8 per cent inflation rate.

The high inflation rate for the quarter (0.8 per cent equals annualised inflation around 3.25 per cent) would seem high enough to prevent the RBA from cutting. After all, the RBA acts with its interest rate settings to keep inflation between 2 and 3 per cent and a 0.8 per cent quarterly rise might be considered the start of a worrying uptick in price pressures.

Sun, 24 Jul 2016  |  

A little over six months into the year, I am doing what almost no other economist does and present a scorecard on my forecasts for 2016. The record is mixed – some big wins, some big errors.

On 1 January 2016, I had my Top 11 tips for the year for economics, politics and markets. Those forecasts are reproduced below, with my assessment of how those forecasts are travelling in bold.

1. Real GDP growth in Australia will accelerate to around 3.25 per cent, driven by strong exports, solid growth in household spending, a further lift in dwelling construction and a meaty contribution from public sector demand. Business investment will remain horribly weak, but even that might find a base during the course of the year. There seems precious little chance that GDP growth will slip below 2 per cent at any stage in 2016. [This forecast is looking quite good although there are some headwinds for GDP in the second half of the year. A reasonably good forecast.]

Sun, 24 Jul 2016  |  

This article first appeared on The Guardian web site at this address: https://www.theguardian.com/australia-news/2016/jul/22/infrastructure-spending-should-be-based-on-need-not-cheap-money?CMP=share_btn_tw 

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Infrastructure spending should be based on need, not cheap money

As Australian government bond yields fall to record lows, debate is hotting up over whether the government should take advantage of these low borrowing costs to increase infrastructure spending.

Such ideas are based on a nice sentiment, but fall short of sound criteria for big spending. If infrastructure is needed, if it is an essential element for aiding productivity and equity, then it should be done based on a proper cost-benefit analysis regardless of the borrowing costs.

It would be absurd to think that infrastructure spending on power generation, roads, rail and ports would not occur simply because interest rates were high. It is a similar story with low interest rates. Why borrow and build infrastructure that may not do much to boost productivity, efficiency and equity just because 10-year government bond yields are at 2%?

To see how infrastructure spending driven by low interest rates can go badly wrong, one only has to look at the experience in Japan.

Sun, 17 Jul 2016  |  

This article first appeared on the Yahoo 7 Finance at this link; https://au.finance.yahoo.com/news/what-the-turnbull-government-must-do-now-011720936.html 

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What the Turnbull government must do now

The Coalition won the election. Labor lost.

Politics, like sporting events, are pretty simple – you are a winner whether the margin is a point or 50, whether you win by a nose or 20 lengths. The prize is the same regardless of the margin. The Melbourne Cup, Olympic gold or government.

Prime Minister Turnbull and his team will set the agenda on economic and budget policy for the next three years. Whatever policies it took to the election, the economic change unfolding domestically and around the world means that the issues confronting the government are different today than even a few months ago and future risks, both positive and negative, cannot be fully anticipated.

All that should matter for the Turnbull government is having the nous, pragmatism and common sense to adjust policy as these unforecastable events unfold. The Coalition government must do all that it can to promote economic growth, repair the budget and lower the unemployment rate.

The Abbott and Turnbull governments failed on all these three fronts in its prior term, so it is to be hoped it has learned from these shortcomings and over the next three years delivers on its commitments on these vital benchmarks. It needs to stop spending money in low priority areas and look to the tax base to restore the budget balance.

Wed, 06 Jul 2016  |  

This article first appeared on The Guardian website at this link: https://www.theguardian.com/australia-news/commentisfree/2016/jul/04/labors-chris-bowen-most-valuable-player-of-the-2016-election 

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Labor's Chris Bowen – most valuable player of the 2016 election

The champions of the 2016 election are the shadow treasurer, Chris Bowen, and his economic team. They treated the electorate with respect by releasing detailed policy choices on difficult issues. These choices set the scene for Labor’s overall campaign which has been remarkably successful given how far Labor were behind the Coalition at the end of 2015.

Bowen prosecuted the case for Labor’s economic policy framework during the campaign, even when it meant the proposed tax changes drew howls of indignation from parts of the electorate and allowed the Liberal party to launch scare campaigns about collapsing house prices and budget deficits.

Without the policy proposals and details outlined by Bowen, Labor would not have stood a chance.

Tue, 05 Jul 2016  |  

Despite the market ructions from Brexit, with the Chinese economy slowing, the US federal Reserve flipping and flopping on its monetary policy outlook, the ‘sell everything’ suggestion from RBS analyst Andrew Roberts is looking very ill.

Markets are strong.

The bet I offered Roberts ( http://thekouk.com/blog/sell-everything-my-challenge-to-andrew-roberts-of-rbs.html ) has a scorecard:

The Kouk 10
Roberts     1

As has been the case for the bulk of the year, the only market where Roberts is ahead is Nikkei which is down 8.2 per cent.

Including that fall, the average rise in the 11 items that Roberts suggested should be sold, the gain so far is a stonking 15.6 per cent.

                                                     Level at time         Latest            Difference %
                                                         of bet
US stocks S&P500                               1925                 2103                9.3
Brazil stocks Ibovespa                        39500               52568              33.1
China stocks Shenzhen                        1850                 2002                8.2
Japan stocks Nikkei                             17200              15776              -8.3
US house prices Case-Shiller              182.83             186.63               2.1
UK 20 city house prices Hometrack    228800           237500               3.8
Sydney house prices Corelogic           915.00             999.13              9.2
Iron ore US$ tonne                              40.50               56.22             38.8
Oil WTI US$ tonne                               31.50               48.99             55.5
Copper US$ tonne                               4325                 4879             12.8
AUD/USD                                          0.7000              0.7530              7.6

Simple average                                                                               15.6

Enough said.

Tue, 05 Jul 2016  |  

This article first appeared on the Yahoo 7 web site at this address: https://au.finance.yahoo.com/news/will-the-election-delay-trigger-the-loss-of-australia-s-aaa-rating-051531071.html 

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Will the election delay trigger the loss of Australia’s AAA rating?

To think that the election result will by itself be the trigger of a loss of Australia’s triple-A credit rating is to be ignorant of the last few years of economic and budget news.

While the hotch-potch of new Senators will make it difficult for the new government, which ever side that may be, to get legislation passed, the Turnbull government’s economic policy agenda was limited to just one meaningful policy – a cut in company tax rates.
Even if Turnbull had won the election convincingly, there would still only have been that lame and expensive company tax cut policy, which in fact undermined the medium term structural integrity of the budget.

It might even be the case that the failure to get the company tax cut legislation through the Parliament, if that happens, will stave off a downgrade to the credit rating given the money saved!

Mon, 04 Jul 2016  |  

This article first appeared on the Yahoo 7 website on 30 June at this address: https://au.finance.yahoo.com/news/will-saturday-s-election-produce-another-shock-result-010344513.html 

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Will Saturday's election produce another shock result?

Election day is almost here.

It’s basically a choice between some extra spending on education and health, paid for by a change to negative gearing and capital gains tax rules versus a substantial company tax cuts paid for by cuts to education and health. The polls are all close, either line ball at 50:50 or one side or the other ahead 51:49.

While the betting market have the Coalition hot favourites at $1.10 (Labor are $7.00), there have been a slew of recent election results that have seen the underdog win. Be it the Brexit vote, the 2015 UK election, the State elections in Queensland and Victoria in recent years, all were shock results largely unseen by the pollsters of the betting markets.

Everyone agrees that there will be a swing to Labor. It will pick up seats. But the strong, but by no means unanimous, view is that Labor will fall just short. The new House of Representatives might be something of the order of 78 to the Coalition, 65 to Labor and seven minor party seats.

Wed, 29 Jun 2016  |  

This article first appeared on the Yahoo7 Finance website at this link: https://au.finance.yahoo.com/news/house-prices-are-falling-232920240.html 

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Are falling house prices masking something more worrying?

For Australia as a whole, the fall is small, at just 0.2 per cent in the March quarter according to official data from the Australian Bureau of Statistics.

This nationwide picture masks something a little more worrying across a number of cities which are showing more significant price falls. This means some buyers are risking negative equity in their house, which means that the value of the mortgage is larger than the value of the property.

In Perth, where the unemployment rate has almost doubled over recent years, the ABS data show housing prices falling 4.8 per cent since the peak in the first half of 2014. Prices are now back to the level of early 2013 meaning that those who have bought a house in the last three years in Perth have either only just broken even – at best – or have lost money.

Wed, 29 Jun 2016  |  

This article first appeared on The Guardian web site at this address: https://www.theguardian.com/business/2016/jun/27/australia-must-consider-fiscal-stimulus-if-brexit-crisis-hurts-the-gobal-economy 

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Australia must be ready to pump cash into the economy if Brexit bites

Brexit is important for Australian policymakers. Whichever side wins the 2 July federal election will need to have policy pragmatism to deal with the potential fallout.

With the British people electing to permanently destroy their wealth, incomes and living standards by voting to leave the European Union, global economic risks have intensified. One only has to witness the savage reaction in financial markets as it became apparent the “Leave” vote was winning.

There were several trillion dollars of value lost to global stock markets, the yield on government bonds fell to never-before-seen levels and currency markets went into meltdown, with the British pound dropping more than 10% to reach its lowest level since 1985.

Australia will not be immune from the fallout from the Brexit vote.

THE LATEST FROM THE KOUK

Get set for an August interest rate cut

Tue, 26 Jul 2016

This article first appeared on the Yahoo7 Finance website at this address: https://au.finance.yahoo.com/news/get-set-for-a-august-interest-rate-cut-045119121.html 

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Get set for an August interest rate cut

Get set for a further interest rate cut on 2 August, which is the date of the next meeting of the Board of the Reserve Bank of Australia. With the economy expanding at a moderate pace, at best, with the unemployment rate appearing to edge up and global economic conditions only fair, the case for a 25 basis point rate cut, to a fresh record low of 1.5 per cent, is solid. It will, nonetheless, be the inflation data next Wednesday that will help to lock in the case for lower rates.

Based on available information, inflation is set to rise by 0.8 per cent in the June quarter, which will leave annual inflation at 1.4 per cent. During the June quarter, there was a sharp lift in petrol prices driven by the jump in global oil prices. This alone will account for around 0.25 percentage points of the 0.8 per cent inflation rate.

The high inflation rate for the quarter (0.8 per cent equals annualised inflation around 3.25 per cent) would seem high enough to prevent the RBA from cutting. After all, the RBA acts with its interest rate settings to keep inflation between 2 and 3 per cent and a 0.8 per cent quarterly rise might be considered the start of a worrying uptick in price pressures.

My 2016 forecasts: A stocktake on how they are going

Sun, 24 Jul 2016

A little over six months into the year, I am doing what almost no other economist does and present a scorecard on my forecasts for 2016. The record is mixed – some big wins, some big errors.

On 1 January 2016, I had my Top 11 tips for the year for economics, politics and markets. Those forecasts are reproduced below, with my assessment of how those forecasts are travelling in bold.

1. Real GDP growth in Australia will accelerate to around 3.25 per cent, driven by strong exports, solid growth in household spending, a further lift in dwelling construction and a meaty contribution from public sector demand. Business investment will remain horribly weak, but even that might find a base during the course of the year. There seems precious little chance that GDP growth will slip below 2 per cent at any stage in 2016. [This forecast is looking quite good although there are some headwinds for GDP in the second half of the year. A reasonably good forecast.]