Blog

Mon, 12 Feb 2018  |  

The following is s series of tweets I recently posted and given the feedback, I thought there were worthy of a blog post.

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The RBA is finally coming around to the fact that the economy is not strong and there is oodles of spare capacity that will not be mopped up for possibly several years.

The RBA were shattered, almost personally, with the low CPI result for Q4 and the jump in unemployment in December. Of vital importance, it has come to the view that the good employment data are not representative of labour force health - unemployment and underemployment are they key.

Wages growth and hence inflation will not pick up while the economy muddles along and the slack in the labour market remains.

Indeed, some basic modelling suggest inflation is more likely to fall below 1% than reach 3% in the next 2 years, even if GDP only marginally undershoots the RBA's very upbeat outlook.

House price are falling: This is good news, for sure, but careful what you wish for. The first few months of 2018 could spell some risks if house price falls accelerate and widen geographically.

Thu, 01 Feb 2018  |  

Deputy Prime Minister and former Shadow Minister for Finance and Debt Reduction came up with an economic doozie when he recommended that people “cash out your house in Sydney, Melbourne or Brisbane, and buy a house in Armidale and you put money in the bank”.

It is a quaint idea until you look at a few basic facts.

The combined population of Sydney, Melbourne and Brisbane is around 13 million.

According to the website realestate.com.au, there are 477 properties for sale in Armidale. There are a further 160 available for rent. If 0.004 per cent of the population of Sydney, Melbourne and Brisbane took up the challenge and bought and rented in Armidale, all properties would be sold and rented. There would be a crazed bidding for housing and prices would go crazy and indeed, there would be a serious dwelling shortage.

Local renters would be crunched when rents were renegotiated and propbably have to leave.

Interestingly, the population of Armidale is 23,000. It would rise 3 fold if just 0.5 per cent of the people of Sydney, Melbourne and Brisbane took up Mr Joyce’s challenge to move. Imagine the stress on the schools, hospitals and roads.

Mr Joyce’s idea is a good one as long as no one takes it up.

Thu, 01 Feb 2018  |  

This article first appeared on the Yahoo 7 Finance website at this link: https://au.finance.yahoo.com/news/negative-gearing-change-221202487.html 

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Is negative gearing about to change?

If the polls and betting markets are correct, there is a good chance that Labor will win the next election and the negative gearing rules that have driven personal investment in housing for many decades will change.

With the Federal election set to be held late this year or early next, Labor are committing to change the policies regarding negative gearing which will radically change the way future investment in the housing market will be allocated.

It is important to emphasise that Labor is not planning to get rid of negative gearing. Far from it. Labor’s policy change boils down to keeping the existing rules for negative gearing for investors buying newly built dwellings, but ending the eligibility of negative gearing for established dwellings. For those investors wanting to negative gear, and there is no doubt there will still be many, it will still be available for new properties. Fill your boots, as they say!

It has been obvious for many years, perhaps decades, that one of the critical issues driving the extreme price rises in the Australian housing market is a lack of supply, relative to demand which has been driven by rampant population growth. In other words, there has not been enough new construction to adequately house the extra population and this shortage has seen prices rise.

The Labor policy change will encourage investment flows to new construction and over time this will help to address the supply / demand imbalance.

What the change to negative gearing will also mean is that demand from investors for established dwellings will fall away markedly. To be sure, people will still be able to buy multiple investment properties if they so desire, but they wont be able to use the tax laws to get other tax payers to subsidise the interest on the debt used to purchase those dwellings.

Tue, 30 Jan 2018  |  

US bond yields are rising more quickly than the equivalent Australian yields.

The 10 year government bond in the US is now yiedling 2.71 per cent, just 14 basis points below the Australian 10 year bond and if the recent trends in the relative economic fundamentals of the two countries is sustained, Australian 10 year yields will fall below those in the US.

It is possible, and indeed my base case that over the next few months, Australian 10 year yields will be 50 basis points below those of the US. US Fed rate hikes, the RBA on hold and soon to change its rhetoric on its wishes for monetary policy will be the triggers for this move.

It is also likely to mean that the Australian dollar, which is currently sniffing the ozone around 0.8100, will fall back, perhaps sharply. The looming election, an uncertain outlook for China and commodity prices and the deterioration in the trade position are also set to undermine AUD strength.

It is not often Australian interest rates are lower than in the US, but with its economy strong and Australia still somewhat problematic, we are about to see this rare event unfold.

 

 

Wed, 24 Jan 2018  |  

Podcast on the economy: This link is to my chat with Philip Clark on Nightline, ABC radio about the year ahead in 2018:

https://www.abc.net.au/radio/programs/nightlife/economic-forecast-2018/9354482 

I must say the caller’s questions were a highlight.

 

Tue, 23 Jan 2018  |  

This article first appeared on the Yahoo 7 Finance website at this link: https://au.finance.yahoo.com/news/2332204-002854969.html 

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'Disconcerting': 5 reasons why interest rates wont rise

Interest rates are about to rise.

So say a growing number of economists and the money market futures which are now pricing in a 25 basis point interest rate rise in the final quarter of 2018 and a further 25 basis point rise in the second quarter of 2019.

The market and many economists are increasingly optimistic that economic growth, wages and inflation will all of a sudden lift back to levels consistent with a healthy economy. The theory is that as a result of this good economic news, the hand of the RBA will be forced to hike rates from what are currently record lows. To be sure, these interest rate rises could happen over that time frame. It would be a most welcome development to see interest rates move higher as it would be a sign of a return to favourable economic conditions for the first time in many years.

But just how reliable are the forecasts and the market pricing?

Mon, 22 Jan 2018  |  

This article first appeared on the Yahoo7 Finance website at this link: https://au.finance.yahoo.com/news/2307140-040859645.html 

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Get ready for election economics

Let’s get a bit of basic economics and budget analysis sorted out as 2018, a likely year for the next Federal election, starts to unfold.

Tax cuts do stimulate economic growth.

Be it company or income taxes that are cut, the impact on economic growth will be positive, at least in the short run. When the government decides to cut taxes by, say, $1 billion a year, there is a simple transfer of $1 billion cash from the government sector with its saving level reduced by that amount, to the private sector. That $1 billion will be available to be spent, invested or even saved by the private sector. Whatever the end mix, there is a boost to the economy.

And yes, it is as simple as that.

But what if the government decides to spend $1 billion extra on educational, roads, consultants, health care, or any other purpose for that matter?

Well, that would stimulate the economy too. The effect would be different to a tax cut because the money would be directed to a specific area (consultants for example) and not as broadly based as a tax cut. But in the end, $1 billion of cash is simply transferred from the government into the bank accounts of those receiving the money via the extra spending.

Again, it is that simple.

Fri, 19 Jan 2018  |  

The recent house price data from Corelogic are showing further falls in house prices.

The falls are, disconcertingly, most evident in Sydney where prices have dropped 0.5 per cent so far in January, which brings the aggregate fall since the September 2017 peak to a chunky 2.9 per cent. This means that for a $1 million property in September, the value has fallen $29,000 in just 4 months.

The house price weakness is not confined to Sydney.

In Melbourne, the Corelogic data shows house prices topping-out. Prices are down 0.3 per cent from the December 2017 peak which, to be sure, is not a large decline after the stunning increases of previous years, but a fall it is.

Thu, 18 Jan 2018  |  

There was another round of euphoria as the monthly labour force data hit the screens. The data showed a nice 34,700 rise in employment in December which brought the total rise in jobs in 2017 to 403,100.

This is good news, to be sure, but how good is it really? What is the context for this increase in employment and how is Australia going in an ever vibrant and dynamic global economy?

Of some concern, Australia’s unemployment rate remains at 5.5 per cent – it actually ticked up from 5.4 per cent the prior month. Interestingly, and something less favourable, is the fact that the unemployment rate has been below 5.5 per cent for just two months (October and November 2017) in the last four and half years. Where is that 5 per cent or lower full-employment target everyone reckons we are near?

What’s more interesting, and a sign of the policy sloth that Australia is enduring at the moment, is that around the world, unemployment rates are falling and are impressively low.

Sure each country will have its quirks but have a look at our 5.5 per cent against these countries.

Tue, 16 Jan 2018  |  

This article first appeared on the Dynamic Syndications website at this link: https://www.dynamicsyndications.com/news/Racehorse-Ownership-Sets-Record-High 

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Racehorse Ownership Sets Record High

 Fantastic news in the racing industry.

Race horse ownership hit a record high in 2016-17, with Syndications giving an increasing number of people access to a share in a racing thoroughbred.

In 2016-17, there were 79,631 owners of a race horse or a share in a race horse. This is up 0.9 per cent from the number a year earlier and up a healthy 16.8 per cent from the level 5 years earlier in 2011-12.

The nature of horse ownership is changing. The number of registered horses to have 10 or more owners rose to a record high of 1,736 which represented 15.3 per cent of all registered horses. Just think of it, one in seven horses running around Australia’s race tracks is owned by 10 or more people. Back in 2005-06, there were only 659 horses with 10 or more owners, which was just 4.8 per cent of all registered owners.

THE LATEST FROM THE KOUK

Podcast: The case for rate cuts, the wages conundrum and the end of QE

Tue, 19 Jun 2018

This is a thoroughly enjoying and I trust interesting podcast I did with the excellent Paul Colgan and the hugely knowledgeable David Scutt.

Click on the link: https://www.businessinsider.com.au/podcast-devils-and-details-stephen-koukoulas-2018-6

Paul and David do a regular podcast "Devels and Detals" on the economy and markets - I strongly recommend it.

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The case for rate cuts, the wages conundrum and the end of QE

Stephen Koukoulas is one of the few economists in Australia who believes the RBA should be cutting rates.

That’s where we start this week on the Devils and Details economics and markets podcast, with the conversation also covering the major central banking decisions from the Fed and the ECB this week, and the impact of the proposed changes to negative gearing on the housing market — which gained a lot of attention this week after the release of the report by RiskWise warning of the potential for severe unintended consequences in some geographical areas from Labor’s policy plans.

You can find the show on iTunes or under “Devils and Details” on your podcasting platform of choice.

 

The remarkably simple case for an RBA rate cut

Mon, 18 Jun 2018

This article first appeared on the Business Insider website at this link: https://www.businessinsider.com.au/rba-rate-cut-2018-6

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The remarkably simple case for an RBA rate cut

The performance of the Australian economy is a bit like my old report cards at school: “Doing reasonably well, but could do better”.

Unlike my approach to school work, which only impacted me, the current policy complacency is seeing unemployment rise, wages growth remain in the doldrums and our $1.8 trillion economy underperform. In the latest test of economic growth, the 3.1 per cent annual GDP growth rate for the March quarter was reasonably good.

It was close the long run trend and a welcome result given the performance of the economy in recent years.

Alas, it is probable that this 3.1 per cent growth rate will turn out to be a “one-off” spike, with some pull-back in the June quarter highly likely from a lower contribution to GDP from net exports, inventories and government demand. When the June quarter national accounts are released in early September, annual GDP growth is likely to slip back to around 2.7 per cent.