Blog

Thu, 05 Dec 2019  |  

This article first appeared on the Yahoo Finance web site at this link: https://au.finance.yahoo.com/news/rba-tools-reluctant-042742904.html

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The RBA has the tools to fix the economy, but is reluctant to use them

The Reserve Bank of Australia has made a range of serious policy errors over the past few years, and the Australian economy is weaker because of those mistakes and misjudgments.

Not only is the RBA on track to miss its inflation target for six years, and perhaps longer, the persistently high unemployment rate in concert with record low wages growth is the result of the RBA’s tardiness in cutting interest rates because of its textbook obsession with house prices and household debt.

It is a mistake that has cost the economy tens of billions of dollars in lost output; employment is many thousands of people below what could have been achieved; and all the while wages growth hovers near record lows undermining the wellbeing of the workforce. What’s worse, the RBA seems to have thrown in the towel on trying to meet its inflation target, even though that target was confirmed a month ago in the recent update of the Conduct of Monetary Policy between the RBA and Treasurer.

In this context, Deputy Governor of the RBA, Guy Debelle, gave a fascinating speech earlier this week on the topic of employment and wages.

Mon, 25 Nov 2019  |  

This article first appeared on the Yahoo website at this link: https://au.finance.yahoo.com/news/household-wealth-booming-200022930.html 

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Household wealth is booming: What this means

$500,000,000,000.

In other words, half a trillion dollars.

That is approximately the amount Australian household wealth has increased since the start of July 2019, with house prices surging, the Australian stock market moving higher, and savings increasing.

The bulk of the gains have occurred via rising house prices, which according to CoreLogic, are up over 5 per cent in less than five months. This move in house prices has added around $360 billion to the value of housing and is driving the rebound in wealth. At the same time, the level of the ASX has risen by around 2 per cent with a further $40 billion being paid out in dividends. This allows for the recent pull back on prices as new banking scandals are exposed.

In these conditions of rising wealth, the household sector is getting a serious financial reprieve, despite the ongoing weakness in wages and the still very high level of unemployment and underemployment which afflicts almost 14 per cent of the workforce.

The good news is that this wealth creation is likely to spark a rise in household spending growth once the gains are widely acknowledged in the community and then feed into consumer sentiment. This is most likely to show up in the first half of 2020, after the usual lags work their way through the economy. History shows that when we consumers experience growth in our wealth, we are more inclined to lift our spending.

Earlier this year, RBA researchers Diego May, Gabriela Nodari and Daniel Rees found that:

“When wealth increases, Australian households consume more. Spending on durable goods, like motor vehicles, and discretionary goods, such as recreation, appears to be most responsive to changes in household wealth”.

We saw this, in the reverse, in the period from the middle of 2017 to the middle of 2019 when Australia-wide house prices fell by 10 per cent, crunching wealth levels. It was no surprise that during this period, household spending growth slumped. The retail sales component fell to its weakest since the early 1990s recession. Consumer spending and confidence was not helped by the coincident weakness in wages growth and the policy mistake of the RBA which refused to cut official interest rates, even though the economy was mired in a low inflation, low growth and falling wealth climate.

Thankfully, common sense has since prevailed at the RBA and it has cut interest rates three times since June.

Demand for housing has also lifted with shrewd first home buyers taking advantage of favourable affordability and investors also stepping back in after the May election saw the return of the Coalition government and the demise of Labor’s proposal to reform negative gearing tax laws. The current wealth surge unfolding now is occurring at a time when there is also a sharp decline in the debt-servicing burden as interest rates fall. This has the dual effect of freeing up cash flows for some consumers and allows other to accelerate their debt repayment.

For the moment, the labour market remains weak and wages are still stuck in the mud. These will constrain any near term lift in household spending, but the wealth lift will be vital for sparking a pick-up in consumption, probably in the new year when the effect is more widely observed and entrenched.

It adds to the scenario where 2020 is looking like a better year for the economy with bottom line GDP growth set to hit 3 per cent in the second half of the year.  If the wealth effects build further over that time and business investment and infrastructure spending continues to lift, the economy in 2020 just might register its strongest growth rate in a decade.

 

Thu, 07 Nov 2019  |  

This article first appeared on the Yahoo Finance website on 20 May 2019 at this link:  https://au.finance.yahoo.com/news/why-labor-lost-the-election-so-badly-211049089.html 

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How Labor lost the federal election SO badly

The Coalition did not win the election, Labor lost it.

The tally since 1993 for Labor is a devastating seven losses out of nine Federal elections. By the time of the next election in 2022, Labor will have been in Opposition for 23 of the last 29 years. Miserable.

The reasons for Labor’s 2019 election loss are much more than the common analysis that Labor’s policy agenda on tax reform was a big target that voters were not willing to embrace.

Where the Labor Party also capitulated and have for some time was in a broader discussion of the economy where it failed dismally to counter the Coalition’s claims about “a strong economy”.

In what should have been political manna from heaven for Labor, the latest economic data confirmed Australia to be in a per capita recession. This devastating economic scorecard for the Coalition government was rarely if ever mentioned by Labor leader Bill Shorten and his team during the election campaign.

This was an error.

If Labor spoke of the “per capita recession” as much as the Coalition mentioned a “strong economy”, voters would have had their economic and financial uncertainties and concerns confirmed by an elevated debate on the economy based on facts.

This parlous economic position could have been cited by Labor for its reform agenda.

Thu, 07 Nov 2019  |  

This article was written on 31 October 2019: It was on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/animals-crucial-australian-economy-192927904.html 

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Why animals are a crucial part of the Australian economy

Animals are a critical part of the Australian economy, either for food, companionship or entertainment.

But every month, millions of sheep, cattle, pigs, chickens, fish and other animals are bred and then killed. Most of them are killed in what we define as ‘humane’, but no doubt tens of thousands are horribly mistreated, as are a proportion of the animals we keep as pets.

Animals are slaughtered to provide food for human food consumption, to feed other animals (your cats and dogs are carnivorous) and for fertiliser.

The Australian Bureau of Statistics collects a range of data on animal slaughterings and the most recent release of the Livestock and Meat data release included the following facts.

Thu, 07 Nov 2019  |  

This article was written on 31 October 2019: It was on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/inflation-how-low-can-you-go-004522764.html 

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Inflation: How low can it go?

The Reserve Bank of Australia’s policy embarrassment continues with the September quarter consumer price index data showing the quarterly underlying inflation at 0.4 per cent, which translates to an annual rise of just 1.4 per cent.

In underlying terms, annual inflation has never been lower.

This locks in 4 straight years where underlying inflation has been below 2 per cent, the bottom of the RBA’s 2 to 3 per cent target.

It locks in 5 years where inflation has been at or below 2.5 per cent, the mid-point of that target.

It locks in just under a decade since inflation was above 3 per cent.

Missing the inflation target so badly for such an extended times says quite plainly that the RBA policy actions were wrong, particularly when other central banks around the world were able to meet their inflation targets with pro-active monetary policy settings.

Until the post-election interest rates cuts which have seen the official cash rate belatedly reduced to 0.75 per cent, the RBA held interest rates at a high level. So high, in fact, that annual economic growth slumped to a decade low under 1.5 per cent, this has seen the unemployment rate remain at or above 5 per cent and wages growth tracked plumbed near record lows.

Thu, 07 Nov 2019  |  

This article was written on 23 October 2019: It was on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/economy-perking-up-kouk-195329917.html 

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Don’t look now, but the economy just might be perking up

Every month or so, I undertake a total revamp of my assessment and forecasts for the economy.

With this wipe-the-slate-clean revamp, I take account of the most up to date data, incorporate policy changes and I build in new judgments on the outlook for the global economy.

And so it was last week, when I was revamping my GDP forecasting spreadsheet to assess the risks of recession, the prospects for a booming rebound and all things in between.

It is a lot of fun and helps me to throw forward pre-empt how the economy and, importantly, financial markets will travel. That said, I am not one of those eggheads who lives and dies by what my model is telling me, but such spreadsheet fiddling makes me sit up and take notice of what is happening.

The last update, last week, was one of those times.

Economy to perk up in 2020: Here’s why

Indeed, for the first time in quite a while, I am getting a bit excited about the upside for the economy in 2020. Not a boom, but solid, strong, decent economic growth lies ahead. In fact, I now put the chances of the economy falling into recession in 2020 or 2021 for that matter at about 0.1 per cent. Never say never, but I am more likely to beat Usain Bolt over 100 metres than the Australian economy is of cascading into recession.

Here’s the how and why of how I reached that conclusion.

Thu, 07 Nov 2019  |  

This article was written on 10 October 2019: It was on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/why-worry-household-debt-190036599.html 

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Why are we so worried about household debt?

The discussion of household debt and how it is meant to be the catalyst for a recession, house price crash or some other melodramatic catastrophe, is one sided, dull and invariably driven by purveyors of snake oil.

Sure, the level of household debt in Australia is higher than it has ever been, and the average Australian householder has more debt relative to their income than just about anyone else in the world.

But so what?

In isolation, this might be scary stuff. A worry. The reason why the Australian economy is at risk of an almighty collapse.

In context, however, there is very little to be worried about given the remarkable level of assets and accumulated wealth that debt is benchmarked against. In other words, the level of debt is a meaningless number unless it is benchmarked against the other side of the ledger – assets and wealth.

Household debt: Setting the facts straight

Here are some basic facts about household debt and wealth in Australia at the moment.

Household debt is 190 per cent of household disposable income.

Against this, the level of household wealth in the ownership of dwellings is approximately 500 per cent of household disposable income, even allowing for the fall in house prices between the middle of 2017 and the middle of 2019.
In addition to that are so-called household financial assets, which includes things like superannuation balances, bank deposits, direct share holdings and the like. The value of these assets is approximately 430 per cent of household disposable income.

This means the level of gross household wealth is around 930 per cent of income which, quite plainly, swamps the 190 per cent of household debt.

In turn, this means ‘net’ household wealth – which is the sum of all assets minus all liabilities (debt) is approximately 750 per cent of income.

Thu, 07 Nov 2019  |  

This article was written on 14 October 2019: It was on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/ignore-government-debt-225040404.html 

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‘Utterly desperate’: Why Scott Morrison wants you to ignore government debt

When it comes to government debt, the Morrison government is desperate for you to keep your eyes and ears closes and ignore the facts.

Utterly desperate.

These facts are likely to be defined by Prime Minister Morrison as being ‘in the Canberra bubble’ and therefore not worth talking about.

So what is happening with government debt? You know, the government debt that when the Liberal Party was in opposition and Labor were in power was “a disaster”, that was “undermining our kid’s future” and threatened to “ruin the economy”.

When in Opposition, the Liberal Party promised to return to the budget to surplus and to “pay off Labor’s debt”. It was a promise that created and then reinforced a perception, at least in the mind of some voters, that the Liberal Party is a better economic manager than Labor. This perception has been a critical factor in the Coalition winning the last three elections in 2013, 2016 and most recently in 2019.

Last week, updated data on government debt were released which allowed for an up to the minute assessment of how those promises on debt reduction are going.

In terms of gross government debt, data from the Australian Office of Financial Management shows it reached a record $565 billion as at 11 October 2019. At the time of the September 2013 election, gross government debt was just $273 billion.

This means that in a little over six years, with six budgets and countless policy changes and reforms from the Coalition, gross debt has increased by $292 billion or 107 per cent.

Thu, 07 Nov 2019  |  

This article was written on 8 October 2019: It was on the Yahoo Finance website at this link https://au.finance.yahoo.com/news/open-letter-frydenberg-kouk-203308160.html 

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An open letter to Treasurer Josh Frydenberg

Dear Josh,

On a range of policy issues, we do not see eye-to-eye.

But on the big picture view of the economy, I am sure we at one that the best thing policy can achieve for the Australian economy is sustained, strong economic growth. This means a growth rate that is sufficient to give a job to everyone who wants one, where real wages are rising and where there are improvements in the well-being of every day Australians.

As I look at the economic scorecard since you have been Treasurer, I am bitterly disappointed to see that economic growth has slumped and is no better than during

I see the unemployment not only heading higher, but the level of underemployment rising to a point where one in 12 people with a job are not working the number of hours they would like.

I look at wages growth and see stagnation, and in per capita terms, the thing that best measures true economic progress, the economy is going backwards. A per capita recession, if you like.

Then I look at what is being done about this fragile state of affairs.

To its credit, the Reserve Bank is easing monetary policy but as I am sure you are aware, the cash rate is getting close to zero which could create policy concerns for the Bank if the economy remains in the doldrums. Sure, it could implement negative interest rates or embark on a program of quantitative easing, but the impact of these policies on growth and jobs is unpredictable and may be hard to unwind, even if they work.

Which brings me to the crux of my letter to you.

You are in charge of Commonwealth government spending and taxing policies which together amount to around $1 trillion per annum. Last financial year, as you recently noted, there was an unexpected narrowing of the budget deficit from the time of the May 2018 budget.

The balanced budget you delivered occurred with the Government’s tax take for 2018-19 a remarkable $11 billion higher than forecast, while government spending was over $6 billion lower than forecast.

These differences totalled nearly $18 billion, or 0.9 per cent of GDP. That’s the difference between 2018-19 GDP growth of the actual 1.9 per cent and something closer to trend at 2.8 per cent. This money was withdrawn from the economy by your government and it is a critical reason why GDP growth has collapsed so disconcertingly.

If you are fair dinkum about being a Treasurer that wants to preside over a strong economy, where there is full employment, rising real wages and improvements in individual well-being, how about using your policy powers and prowess to get a bit of extra cash into the economy?

Thu, 07 Nov 2019  |  

This article was written on 17 September 2019: It was on the Yahoo Finance website at this link https://au.finance.yahoo.com/news/house-price-falls-near-end-022809313.html 

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House prices falls are coming to an end – and my house price bet is looking safe

About a year ago, the melodramatic Martin North from Digital Finance Analytics made the sensational claim on 60 Minutes that house prices “could fall 40 to 45 per cent” over “the next 3 years or so”.

This outlandish forecast was so reckless and irresponsible, that I offered Mr North a chance to put his money where his mouth was, offering him a bet that his forecast would be wrong. Having some ‘flesh in the game’ when making forecasts like that really focuses the mind and tests the resolve of those making headlines and scaring the general population who may actually believe such snake oil.

Surprisingly, Mr North was unwilling to take up my offer.

This was disappointing until Tony Locantro, Investment Manager with Alto Capital in Perth, stepped up to take the bet.

I was generous, offering odds of 6 to 1 that house prices would fall by more than 35.0 per cent over a 3 year period. The bet is framed on dwelling prices, measured by the Australian Bureau of Statistics on a quarterly basis in Sydney, Melbourne or for the average of the eight capital cities. If prices fall by 35.0 per cent or more from the peak levels by the time the December quarter 2021 data are released, in either Sydney, Melbourne or the average of the eight cities, I will lose.

It is as simple as that.

The ABS has just released the June quarter 2019 house price data.

THE LATEST FROM THE KOUK

The RBA has the tools to fix the economy, but is reluctant to use them

Thu, 05 Dec 2019

This article first appeared on the Yahoo Finance web site at this link: https://au.finance.yahoo.com/news/rba-tools-reluctant-042742904.html

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The RBA has the tools to fix the economy, but is reluctant to use them

The Reserve Bank of Australia has made a range of serious policy errors over the past few years, and the Australian economy is weaker because of those mistakes and misjudgments.

Not only is the RBA on track to miss its inflation target for six years, and perhaps longer, the persistently high unemployment rate in concert with record low wages growth is the result of the RBA’s tardiness in cutting interest rates because of its textbook obsession with house prices and household debt.

It is a mistake that has cost the economy tens of billions of dollars in lost output; employment is many thousands of people below what could have been achieved; and all the while wages growth hovers near record lows undermining the wellbeing of the workforce. What’s worse, the RBA seems to have thrown in the towel on trying to meet its inflation target, even though that target was confirmed a month ago in the recent update of the Conduct of Monetary Policy between the RBA and Treasurer.

In this context, Deputy Governor of the RBA, Guy Debelle, gave a fascinating speech earlier this week on the topic of employment and wages.

Household wealth is booming: What this means

Mon, 25 Nov 2019

This article first appeared on the Yahoo website at this link: https://au.finance.yahoo.com/news/household-wealth-booming-200022930.html 

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Household wealth is booming: What this means

$500,000,000,000.

In other words, half a trillion dollars.

That is approximately the amount Australian household wealth has increased since the start of July 2019, with house prices surging, the Australian stock market moving higher, and savings increasing.

The bulk of the gains have occurred via rising house prices, which according to CoreLogic, are up over 5 per cent in less than five months. This move in house prices has added around $360 billion to the value of housing and is driving the rebound in wealth. At the same time, the level of the ASX has risen by around 2 per cent with a further $40 billion being paid out in dividends. This allows for the recent pull back on prices as new banking scandals are exposed.

In these conditions of rising wealth, the household sector is getting a serious financial reprieve, despite the ongoing weakness in wages and the still very high level of unemployment and underemployment which afflicts almost 14 per cent of the workforce.

The good news is that this wealth creation is likely to spark a rise in household spending growth once the gains are widely acknowledged in the community and then feed into consumer sentiment. This is most likely to show up in the first half of 2020, after the usual lags work their way through the economy. History shows that when we consumers experience growth in our wealth, we are more inclined to lift our spending.

Earlier this year, RBA researchers Diego May, Gabriela Nodari and Daniel Rees found that:

“When wealth increases, Australian households consume more. Spending on durable goods, like motor vehicles, and discretionary goods, such as recreation, appears to be most responsive to changes in household wealth”.

We saw this, in the reverse, in the period from the middle of 2017 to the middle of 2019 when Australia-wide house prices fell by 10 per cent, crunching wealth levels. It was no surprise that during this period, household spending growth slumped. The retail sales component fell to its weakest since the early 1990s recession. Consumer spending and confidence was not helped by the coincident weakness in wages growth and the policy mistake of the RBA which refused to cut official interest rates, even though the economy was mired in a low inflation, low growth and falling wealth climate.

Thankfully, common sense has since prevailed at the RBA and it has cut interest rates three times since June.

Demand for housing has also lifted with shrewd first home buyers taking advantage of favourable affordability and investors also stepping back in after the May election saw the return of the Coalition government and the demise of Labor’s proposal to reform negative gearing tax laws. The current wealth surge unfolding now is occurring at a time when there is also a sharp decline in the debt-servicing burden as interest rates fall. This has the dual effect of freeing up cash flows for some consumers and allows other to accelerate their debt repayment.

For the moment, the labour market remains weak and wages are still stuck in the mud. These will constrain any near term lift in household spending, but the wealth lift will be vital for sparking a pick-up in consumption, probably in the new year when the effect is more widely observed and entrenched.

It adds to the scenario where 2020 is looking like a better year for the economy with bottom line GDP growth set to hit 3 per cent in the second half of the year.  If the wealth effects build further over that time and business investment and infrastructure spending continues to lift, the economy in 2020 just might register its strongest growth rate in a decade.