Blog

Thu, 06 Dec 2018  |  

This article first appeared on the Yahoo Finance web site at this link: https://au.finance.yahoo.com/news/dont-fall-spin-scott-morrisons-budget-surplus-no-certainty-224422761.html 

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Don’t fall for the spin - Scott Morrison’s budget surplus is no certainty

Prime Minister Scott Morrison could yet be guilty of prematurely declaring that his government will deliver a budget surplus in 2018-19.

Sure, tax revenue is growing at a rapid pace and the government is underspending on a range of government services, but there are still seven long months to go between now and the end of the financial year that might yet blow up the surplus commitment.

PM Morrison’s ‘return to surplus’ boast is based, it appears, on hard data for the first four months of the 2018-19 financial year on revenue and spending information from the Department of Finance. These numbers do look strong, at least in terms of the budget numbers and if the trends on revenue and spending continue, the budget will probably be in surplus. Treasury will be factoring in ongoing economic growth, no increase in the unemployment rate and buoyant iron ore and coal prices over the remainder of the financial year. These forecasts and hence the budget bottom line are subject to a good deal of uncertainty, as they are every year.

If, as is distinctly possible, the economy stalls in the March and June quarters 2019, commodity prices continue to weaken and if there are some unexpected increases in government spending, the current erroneous forecasts for revenue and spending could leave the budget in deficit.

Wed, 05 Dec 2018  |  

In the wake of the September quarter national accounts, and with accumulating information on house prices, dwelling investment, the global economy and spare capacity in the labour market, I have revised my outlook for official interest rates.

For some time, I have been expecting the RBA to cut the official cash rate to 1.0 per cent, a forecast that has been wrong (clearly) given its decision to leave rates steady right through 2018.

That said, it has been a highly profitable call with the market pricing interest rate hikes when the call was made which has yielded a decent return as time has passed.

My updated profile for RBA rates is:

May 2019 – 25bp cut to 1.25%
August 2019 – 25bp cut to 1.00%
November 2019 – 25bp cut to 0.75%

The risk is for rates to 0.5% in very late 2019 or in 2020

It will be driven by:

  • Underlying inflation remaining below 2%
  • GDP growth around 0.25 to 0.5% per quarter in 2019
  • Annual wages growth stuck at 2.5% or less
  • Global growth slowing towards 3%
  • Labour market under-utilisation around 13 to 13.5%

There are likely to be other influences, but these are the main ones.

AUD, as a result, looks set to drop to 0.6000 – 0.6500 range.

Wed, 05 Dec 2018  |  

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/business-investment-recession-two-quarters-decline-195204034.html 

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Business investment in recession with two quarters of decline

Businesses are under pressure and the economy remains in a problematic state with the latest news on private sector business investment painting a mixed picture. Business investment is the area the Reserve Bank and Treasury have pinned their hopes on for a strong economy into 2019 and 2020.

According to the latest ABS data, business investment fell 0.5 per cent in the September quarter after sliding 0.9 per cent in the June quarter and it was below the level of a year ago.
This is not good, which ever way you cut the data.

Business investment is the bedrock of any economy. When businesses are building factories, shopping centres, office blocks, hotels and the like or are buying new machinery, equipment and vehicles, the productive capacity of the economy is being nourished. This nourishment allows the economy to grow at a faster pace and create job opportunities for workers and good profit growth for the businesses doing the investment. The spin off for the rest of the economy is substantial from the cycle in business investment.

The reasons for the poor investment climate at the moment are linked to a protracted slump in the mining sector where there is a substantial amount of excess capacity that will take some time to absorb. Even with commodity prices being buoyant, the mining sector will continue to scaling back investment spending.

Thu, 22 Nov 2018  |  

This article first appeared on the Yahoo 7 Finance website at this link: https://au.finance.yahoo.com/news/heres-global-economic-slowdown-will-affect-australia-204836678.html 

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Here's how the global economic slowdown will affect Australia

There are a few worrying trends unfolding in the global economy, ones that threaten to have a negative impact on Australia into 2019. The question now is how significant the slowdown in global economic growth will be, and how will it show up in the Australian economy.

Some facts first.

In the September quarter, GDP fell in Japan and Germany and it has weakened in all other major countries, including China. The leading indicators on business sentiment and housing, which pre-empt economic conditions, point to the December quarter also being weak across the world. It is a scenario that has financial markets repricing stock markets, commodity prices and expectations for interest rates.

The reasons for the global slowdown are varied.

Wed, 21 Nov 2018  |  

This article first appeared on The Wire, the web page for FIIG, at this link: https://thewire.fiig.com.au/article/commentary/opinion/2018/11/19/rba-ignores-property-at-its-peril 

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RBA ignores property at its peril

The RBA rolls the dice on house prices

The usually careful and well considered Reserve Bank of Australia is taking a huge gamble on the Australian economy into 2019 and 2020.

The RBA is betting that the current slump in house prices and dwelling approvals are orderly and will not have any material or lasting consequences for the economy. In fact, RBA Governor Philip Lowe believes the fall in Australian house prices “is good news”, “manageable” and “a welcome development”. Further, in its November Statement on Monetary Policy, the RBA suggested that house prices “have continued to ease gradually”, which is a remarkably bland assessment given that close to $400bn has been wiped off the value of Australian houses since the price peak in September 2017.

Governor Lowe and the RBA’s open indifference to what is a major shift in the $7trn valuation of residential property is bold.

Wealth and household spending – The link

While some cooling in house prices was always inevitable following the price boom in the four years to 2017, the price falls are getting close to a point where the loss of household wealth will impact household spending. The RBA itself and a bevy of global academic research show a link between changes in household wealth and growth in household spending.

Tue, 13 Nov 2018  |  

This article first appeared on the Business Insider web page at this link: https://www.businessinsider.com.au/labor-negative-gearing-impact-housing-comment-2018-11 

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How Labor’s plans to revamp negative gearing could put a floor on house prices and lower rents

The economic policy debate over Labor’s plans to overhaul the negative gearing rules is hotting up.

It is an important debate on a policy change that will have implications for the housing market, particularly for first home buyer and investor demand.

The government is claiming that the negative gearing change will “take a sledgehammer”, “smash” and “punish” everyone in Australia. Treasurer Josh Frydenberg says that under Labor, “your home will be worth less and renters will pay more.”

It is a frightening scenario for property obsessed Australians with the value of all dwellings in Australia estimated to be around $7 trillion.

But is it true? What are the facts about the current housing cycle and how will Labor’s plans to revamp negative gearing impact the housing market?

Tue, 06 Nov 2018  |  

This article first appeared on the Yahoo 7 website at this link: https://au.finance.yahoo.com/news/heres-reserve-bank-needs-cut-rates-000642869.htm

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An RBA rate cut is not about housing – it’s about exports and investment

Many people misunderstand my concern about falling house prices and the coincident call for the Reserve Bank to cut official interest rates.

Any interest rate cut that the RBA may yet deliver should not, and certainly will not, be aimed directly at supporting house prices. On the contrary – future interest rate cuts should be directed at supporting the economy more generally at a time when the house price falls threaten to erode household wealth, consumer spending and the economy more generally.

The house price declines in the current downturn are much what I was forecasting a year ago. The issues surrounding the price falls are being compounded by the recent acceleration of the decline, the historic collapse in housing auction clearance rates, the escalation of the bank credit freeze and the on-going problems with low wages and inflation that are all creating an environment that will hit the economy into 2019.

While a recession in Australia is still unlikely, very unlikely in fact, there is a growing risk the unfolding mix of events will hit the economy hard.

The destruction in household wealth from the falls in house prices alone is now about $300 billion. Add to this another $100 billion of wealth destruction from the recent fall in the stock market, and a climate of severe weakness in consumer spending is front and centre in the outlook for most credible forecasters.

Thu, 01 Nov 2018  |  

This article first appeared on the Yahoo7 Finance website at this link: https://au.finance.yahoo.com/news/important-energy-prices-big-picture-225353697.html 

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How important are energy prices in the big picture?

What does it say about the Australian economy when energy prices, or more particularly the price of electricity, is a dominant issue for the Prime Minister, his ministers and the government more generally.

Think about it – electricity prices!

Not unemployment, care for older Australians, low wages growth, climate change, housing affordability or even education and training. These are things that should be much higher up the list of things for a government to do than worrying about the price of running your fridge, lights and heater.

For consumers, about 2.3 per cent of household expenditure is on electricity, which equates to an average of about $35 a week. It is not a trivial amount but in context, it is not a huge impost.

Consumers spend about 50 per cent more on restaurant meals, some 300 per cent more on holidays and 40 per cent more on tobacco. They also spend about 60 per cent more on beer and wine than they do each week on electricity.
To be sure, the price of electricity has surged over the past decade or so which has been important for some, mainly low income, household budgets. And for some who spend more than the average amount of electricity, higher prices can have a slightly higher impact.

Since the start of 2009, retail electricity prices have risen 99 per cent. This is a big rise. This is well above the 28 per cent rise in wages over the same time.

But let’s look at price changes in a range of other items over that time.

Thu, 01 Nov 2018  |  

The September quarter CPI confirmed annual underlying inflation easing back to 1.7 per cent, well away from the mid-point of the 2 to 3 per cent target range.

The result locked in fours years where inflation has been below the mid point of the range and two years where it has come in below the bottom of the target band.

For the RBA, this is a fail.

A fail not because of a temporary miss. The odd miss on inflation is inevitable and is fine. Shocks sometimes come along and there are periods where inflation spikes or drop temporarily.

But this is no temporary miss.

Doing nothing about two years of missing the target and then having a forecast profile that suggests there will be another couple of years where inflation remains below the mid-point of the target is a policy elitism that damages growth, employment and wages.

Tue, 30 Oct 2018  |  

This article is from 29 August 2018 and first appeared on the Business Insider website at this link: https://www.businessinsider.com.au/making-the-rba-relevant-again-2018-8 

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The new Treasurer has a real shot at making the RBA relevant again - and it starts with cutting interest rates

 It is not clear what new Treasurer Josh Frydenberg discussed with Reserve Bank Governor Phillip Lowe during their recent conversation, but one thing that should have been top of the agenda is a reworking of the Statement on the Conduct of Monetary Policy.

The appointment of a new Treasurer opens the door for this vitally important policy document on how the RBA undertakes its policy task to be updated and revamped. 

In September 2016, when former Treasurer Scott Morrison and newly appointed Governor Lowe updated the framework in which the RBA would operate monetary policy, “financial stability” was included as an objective for policy. It is not clear why this would have been added to the RBA’s agenda when the existing 2 to 3 per cent inflation target had been working so well.  Whatever the reason, the inclusion of “financial stability” has meant the RBA has downplayed, if not effectively abandoned its inflation target and this explains the ongoing sluggishness in the rate of growth, the still high level of labour market underutilsation and the associated record low wages growth which has been seen in the past year.

One of the first things Mr Frydenberg should do as Treasurer is revamp the Government’s conduct of monetary policy and exclude financial stability, which was never defined, and return the focus to the inflation target. Under the current arrangements, the RBA has missed its inflation target for the past three years and with its most recent forecasts, the mid point of the inflation target will not be hit until at least 2021.

THE LATEST FROM THE KOUK

Don’t fall for the spin - Scott Morrison’s budget surplus is no certainty

Thu, 06 Dec 2018

This article first appeared on the Yahoo Finance web site at this link: https://au.finance.yahoo.com/news/dont-fall-spin-scott-morrisons-budget-surplus-no-certainty-224422761.html 

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Don’t fall for the spin - Scott Morrison’s budget surplus is no certainty

Prime Minister Scott Morrison could yet be guilty of prematurely declaring that his government will deliver a budget surplus in 2018-19.

Sure, tax revenue is growing at a rapid pace and the government is underspending on a range of government services, but there are still seven long months to go between now and the end of the financial year that might yet blow up the surplus commitment.

PM Morrison’s ‘return to surplus’ boast is based, it appears, on hard data for the first four months of the 2018-19 financial year on revenue and spending information from the Department of Finance. These numbers do look strong, at least in terms of the budget numbers and if the trends on revenue and spending continue, the budget will probably be in surplus. Treasury will be factoring in ongoing economic growth, no increase in the unemployment rate and buoyant iron ore and coal prices over the remainder of the financial year. These forecasts and hence the budget bottom line are subject to a good deal of uncertainty, as they are every year.

If, as is distinctly possible, the economy stalls in the March and June quarters 2019, commodity prices continue to weaken and if there are some unexpected increases in government spending, the current erroneous forecasts for revenue and spending could leave the budget in deficit.

Change of view on monetary policy

Wed, 05 Dec 2018

In the wake of the September quarter national accounts, and with accumulating information on house prices, dwelling investment, the global economy and spare capacity in the labour market, I have revised my outlook for official interest rates.

For some time, I have been expecting the RBA to cut the official cash rate to 1.0 per cent, a forecast that has been wrong (clearly) given its decision to leave rates steady right through 2018.

That said, it has been a highly profitable call with the market pricing interest rate hikes when the call was made which has yielded a decent return as time has passed.

My updated profile for RBA rates is:

May 2019 – 25bp cut to 1.25%
August 2019 – 25bp cut to 1.00%
November 2019 – 25bp cut to 0.75%

The risk is for rates to 0.5% in very late 2019 or in 2020

It will be driven by:

  • Underlying inflation remaining below 2%
  • GDP growth around 0.25 to 0.5% per quarter in 2019
  • Annual wages growth stuck at 2.5% or less
  • Global growth slowing towards 3%
  • Labour market under-utilisation around 13 to 13.5%

There are likely to be other influences, but these are the main ones.

AUD, as a result, looks set to drop to 0.6000 – 0.6500 range.