Since a price was put on carbon on 1 July 2012, there have been a few interesting developments in the Australian economy and markets.
Here are a few:
Employment has increased by 193,100.
The ASX has risen by 32 per cent, which has seen the market capitalisation of the Australian stock market rise by just under $400 billion in 20 months. Around $90 billion in dividends have been paid out, over and above this, over that time.
It was always going to happen – the pace of economic growth was certainly strong enough to be generating jobs – it was just the lag between a stronger economy and more jobs that was in question.
So news of a nice jump of 47,300 in employment in February and a flat unemployment rate is certainly good news and it is starting to bring the labour force data into line with the rapid economic expansion now underway in the broader economy.
With house building at record highs, consumer spending returning to above trend growth and export growth running at a strong double digit pace, many more jobs will be created in the year ahead. Indeed, it would be reasonable to expect around 200,000 jobs to be created in the next 12 months, even if the monthly profile to get there is extremely volatile.
The price of iron ore was has been smashed in recent days with it dropping to US$104.70 a tonne yesterday.
The price is some 25 per cent down on the start of the year. It is a big fall for sure but just how worrying is it?
Well, the price of iron ore is, in USD terms, still 550 per cent higher than in 2004; it is 210 per cent higher than at the end of 2006 and over 70 per cent higher that the level in the middle of 2008.
With iron ore prices falling sharply to be down about 15 per cent so far in 2014 in US dollar terms, it is good news for the Australian economy that export volumes are so very strong.
A glance at this chart from the RBA Chart Pack show how the volume of iron ore exports has risen over the past decade.
Export receipts from iron ore are booming even with the lower price, simply because of the volume growth.
Of course it would be wonderful for the Australian economy to maintain sky high prices for iron ore while export volumes were booming. But it is unlikely that that that would ever be the case for any extended period of time. Good old economics is working with higher supply (and exports) being a factor contributing to the fall, regardless of demand from China.
Which of course is where a lot of the current focus is. Just how strong is the Chinese economy and with it, on-going demand for commodities?
Well, the Chinese authorities are aiming for 7.5 per cent GDP growth this year, a pace that seems strong enough to maintain demand.
There is nothing to fear from the falling iron ore price, at this stage, for the future of the economy while ever the growth in the volume of exports exceed the price fall. My guess is a fall below US$90 a tonne without any AUD depreciation would be a worry or if we were to see export volumes drop, it would be all bets off.
For now, watch the iron ore export volumes surge and look at the iron ore price with secondary interest.
The government borrowed another $1.6 billion last week, which brings the total of gross new borrowings to $52.45 billion since the election six months ago.
As has been noted previously, this gross figure includes short term T-Notes and borrowing that cover other bond maturities.
According to the Australian Office of Financial Management, the amount of government debt (gross) has increased by $27.5 billion since the election to a record high $300.7 billion.
The first interest rate hike in the last monetary policy tightening cycle was delivered in October 2009, when the cash rate rose by 25 basis points to 3.25 per cent.
Three months before that rate hike in July 2009, the RBA Governor, Glenn Stevens noted:
- "output has been sluggish and capacity utilisation has fallen back to about average levels, with some further decline likely over the rest of the year. Weaker demand for labour is leading to lower growth in labour costs. These conditions should see inflation continue to abate over the period ahead.
- A pick-up in housing credit demand suggests stronger dwelling activity is likely later in the year. House prices are tending to rise. Business borrowing, on the other hand, has been declining, as companies postpone investment plans and seek to reduce leverage in an environment of tighter lending standards.
- Monetary policy has been eased significantly. Market and mortgage rates are at very low levels by historical standards, despite recent small increases. Business loan rates are below average. The effects of these changes will still be coming through for some time yet.
- The Board's current view is that the outlook for inflation allows some scope for further easing of monetary policy, if needed."
The run of staggeringly good news on the economy continues to roll out.
Today it is a massive lift in retail sales growth – up 1.2 per cent in January and a stonking 9 per cent annualised growth pace over the past 6 months. Consumers are wealthy, with house prices and stocks adding close to $1 trillion to household wealth in the last two years. With high savings, consumers are spending up big.
Just wait until the labour market turns in the next few months and job creation and wages pick up. Retailers are in clover.
The only surprise is that so many people are surprised by these dynamics.
Did you hear that noise?
It was the sound of the Australian lifting a gear and moving back to trend growth.
The national accounts confirmed the Australian economy ending 2013 with GDP growth at a decent 2.8 per cent which translates to an annualised rate of 3 per cent over the final six months of the year.
If you were a policy maker and seeing GDP growth at trend, with inflation jumping to the upper part of your target, when the world economy is lifting, would you consider a record low 2.5 per cent cash rate to be appropriate?
After the release of the labour force and capital expenditure data in recent weeks, an interest rate hike in March was always going to be off the table.
My forecast from five months ago for a hike in March, albeit wrong, left me with a profit on trading given the market was pricing in an interest rate cut for all of that time. So a wrong call that makes money? I'll take that.
The RBA announcement today highlighted its new found view that "growth is expected to strengthen, helped by continued low interest rates and the lower exchange rate". Unlike many in the market, the RBA is clearly looking at the stellar housing activity (prices and construction), solid consumer demand, strong export growth, improving global conditions and a pick up in inflation to support this view.
• Job ads up
• House prices up
• Home building approvals up near record highs
• Retail spending strong
• Company profits growth up over 10 per cent
• Government tax revenue stronger than expected
• Business conditions lifting
• ASX near 6 year high
• Exports booming
• Interest rates at record low
• Government demand no longer restrictive
• Aussie dollar low
• Non-residential construction up
• Inflation lifting to upper part of RBA target band
• Mining investment falling very sharply (but note above the other 90 per cent of the economy)
• Employment weak (but note above, the ANZ job ads)
I'll take the high road on the weight of that evidence.