Blog

Thu, 20 Apr 2017  |  

This article first appeared on The Guardian website at this link: https://www.theguardian.com/australia-news/2017/apr/19/the-australian-budget-is-likely-to-confirm-this-is-a-big-spending-big-taxing-government 

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The Australian budget is likely to confirm this is a big-spending, big-taxing government

While much of the focus of the upcoming federal budget will, quite rightly, be policy issues associated with housing affordability, areas of changes to spending and revenue, there will also be an opportunity to analyse the underlying values of the government.

This will be the fourth budget of the current Coalition government and will show us the ‘big picture’ of government policies and priorities. There will be data on aggregate government spending, taxation receipts, gross and net government debt and the budget deficit.

The most accurate way to analyse the trends in the key budget figures will be to assess them as a ratio of GDP. Government spending, for example, totalled $48.8bn in 1982-83 and this rose to $423.3bn in 2015-16, which is, at face value, an enormous increase. But spending actually fell from 25.8% of GDP in 1982-83 to 25.6% of GDP in 2015-16. It is a similar issue with government debt, the budget deficit and other benchmarks.

Based on the performance of the economy since the last fiscal update in December 2016, the budget is likely to confirm that this is a big-spending, big-taxing government with a strategy for continuing budget deficits and rising debt as it funds some of its pet projects.

It is all but certain that government debt will remain above 25% of GDP in 2017-18 and the forward estimates, meaning the government will be the first in the last 50 years to have spending at more than a quarter of GDP for eight straight years.

Wed, 19 Apr 2017  |  

I was delighted to be on Peter Switzer’s show, Switzer Daily discussing the economy.

Click on here for the link of the discussion: https://www.switzer.com.au/video/stephen-koukoulas-20170418/ 

Let's see who is more right - the optimist (Peter) or me?

 

Wed, 19 Apr 2017  |  

This article first appeared on the Yahoo 7 Finance website at this link: https://au.finance.yahoo.com/news/housing-affordability-axing-prices-answer-024411025.html 

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Housing affordability: Is axing prices the answer?

Improving household affordability does not mean that house prices have to fall. In the crescendo of noise and fury about house prices in Sydney and Melbourne (forget the rest of the Australia in this debate), too many commentators and analysts are suggesting that the only way to improve affordability is for house prices to fall.

That is wrong. Such comments miss the point about how affordability is measured.

Thankfully, the calculation of housing affordability is remarkably straight-forward.

There are three components of housing affordability – house prices, household disposable income and interest rates. The interaction of these three components and nothing else influence how hard or easy it is to buy a house. Affordability in other words.

Fri, 14 Apr 2017  |  

Despite the hoopla that greeted the labour force data which showed employment up 60,000 in March, the labour market, and with it the economy, remain entrenched in a quagmire of funk.

To be sure, the 60,000 rise in employment was welcome, but that jobs growth needs to be put in context of the prior months of disappointingly weak job creation. Annual employment growth remains under 1 per cent which is well below the run rate needed to make inroads into unemployment.

Speaking of which – the unemployment rate stayed at a high 5.9 per cent in March. It is at least 1 percentage point higher than the rate seen when the economy is running at full employment. And interestingly, 5.9 per cent is the same rate that prevailed at the peak of the global crisis!

From a macroeconomic management perspective, the 750,000 people unemployed are a huge resource, untapped and unproductive. Many have limited or depreciating skills. Yet the government wants to make it harder for people to get additional skills, training and education. It is content to have the economy slothfully meander while it focuses on fourth tier policy issues.

The social costs of unemployment are even greater.

Thu, 13 Apr 2017  |  

This article first appeared on the Yahoo 7 Finance website at this link: https://au.finance.yahoo.com/news/got-huge-mortgage-rest-easy-now-231105702.html 

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Got a massive mortgage? Rest easy, for now – you could get a rate cut

Everyone with a large mortgage can rest assured for a while, given that an interest rate hike is unlikely in the next year and if anything, the next move in rates will be a cut.

The market has been speculating about the need for an interest rate hike as the global economy improves and for reasons linked to dealing with house prices in Sydney and Melbourne. The latter point is remarkably silly and ignores one critical factor that always feeds into RBA deliberations – unemployment.

Since December 2002, the Reserve Bank of Australia has hiked interest rates on 17 occasions. Of course, there have been a series of interest rates cuts over that time as well, but it is clear that the unemployment rate is a factor of substance that feeds into the decision to tighten monetary policy.

Those 17 interest rate increases over 15 years have occurred against a range of differing backdrops – the removal of emergency stimulus, dealing with the inflation surge from the terms of trade boom and simply managing the economy in a prudent way, with an eye on keeping the inflation rate on target at between 2 and 3 per cent.

Mon, 10 Apr 2017  |  

A simple post today.

Policy makers in Australia have not done a good job managing the economy. The government’s tax and spending policies like a dog’s breakfast, achieving neither fiscal consolidation nor growth. The RBA has been distracted by Sydney and Melbourne house prices while the rest of the economy splutters and stutters.

Here are some basic facts.

Sun, 09 Apr 2017  |  

I was involved in the preparation of a letter to Prime Minister that debunked the claim that cuts to worker's penalty rates would lead to more employment. A brief summary of the findings, plus a link to the letter, are in the link below.

Full praise to Jim Stanford and John Quiggin for their drive in this project and thanks to the other signatories to the letter – the list is a powerful one.

Read the letter and think about whether wage cuts are a good thing for the economy or not. There are a lot of smart people who don’t think so.

https://www.futurework.org.au/economists_debunk_job_creation_claims_of_penalty_rate_cut

Thu, 06 Apr 2017  |  

This article first appeared on the Yahoo 7 website at this link: https://au.finance.yahoo.com/news/sound-economy-hitting-brick-wall-013818115.html 

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Was that the sound of the economy hitting a brick wall?

Thump!

Was that the sound of the economy hitting a brick wall?

It looks like economic conditions have deteriorated in the early months of 2017 which means the government’s efforts to ramp up its preparations for the budget on 9 May are being undermined. As Treasury works through the latest numbers on government revenue and spending, it is having to put in weak numbers into its forecasting spreadsheet that will constrain its efforts to get the budget back into surplus within the next few years.

The economic news is starting to be of such concern that perhaps the budget deficit is dropping down the order of policy concerns, particularly if, as seems likely, the looming housing slump acts as a trigger to undermine consumer spending and the economy more generally.

Of most concern has been the stalling in employment growth and rise in the unemployment rate to just below 6 per cent. Linked to that is the rise, to a record high, for the underemployment rate. Just under 2 million people are currently unemployed or underemployed which is not only a social problem, but a macroeconomic one. Not working at all or not enough hours means there is a significant part of the workforce being underutilized, not earning – and spending – their wage and in doing so, getting the perpetual motion of economic growth entrenched.

Wed, 05 Apr 2017  |  

A great speech from RBA Governor Philip Lowe last night articulated the issues that are impacting house prices. It covered all bases and was such an important and comprehensive speech that I have chosen to reproduce all aspects of his, in the order he mentioned them and I had added emphasis to highlight each factor at play.

Many media outlets covering the speech have cherry-picked their favourite causes of the house price problem, which is a pity for their readers, given the complexity of factors that have lead to the price boom.

The end point from Lowe is that "in the end addressing the supply side of the housing market is likely to prove a more durable way of dealing with the concerns that people have about debt and housing prices than detailed supervisory guidance."

Here, in order, is what RBA Governor Lowe said- my emphasis: I have added a few comments where appropriate in square brackets.

Tue, 04 Apr 2017  |  

I’ve watched RBA policy actions for close to 30 years and for the first time, I am finding it very hard to read the RBA thinking and actions right now.

For some odd reason, it is ignoring a crush of evidence on soft growth, low inflation and rising unemployment, yet it has and magnified a rise in house prices in Sydney and Melbourne when considering what to do with official interest rates.

This makes it difficult to pick the timing of future interest rate moves and the implications this will have for bond and currency markets, but suffice to say, I am delighted with the trades in place from February which are comfortably in the money (see https://thekouk.com/item/464-trading-for-rba-policy-error.html  ) and in fact I have added a little to each position in recent times.

THE LATEST FROM THE KOUK

illion: Business forecasts bumper profits in 2018

Mon, 11 Dec 2017

The illion Business Expectations Survey presented a positive outlook for the economy.

Business profits expectations for 2018 are the highest they’ve been since 2011, with companies set to boost employee numbers in the first quarter on the back of the positive outlook, according to illion’s latest Business Expectations Survey.

Data from the survey indicated businesses operating in the Finance, Insurance and Real estate sector had the highest profit expectations approaching the new year, followed by the Transport, Communications and Utilities sector.  The survey shows that overall, the Business Expectations Index is up 25.7 percent on the same period last year and the actual performance of businesses across all sectors is at a 13 year high.

Stephen Koukoulas, illion Economic Adviser, said there were a number of factors driving the positive outlook for 2018. “Corporate profits are getting a boost from lower costs, which are being driven by record low interest rates and on-going low wages growth – which is all occurring at a time of solid gains in the ASX”.

Oz economy: The good, the bad and the ugly

Fri, 08 Dec 2017

This article first appeared on the Yahoo 7 Finance website at this link: https://au.finance.yahoo.com/news/2138618-050543271.html 

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Oz economy: The good, the bad and the ugly

The Australian economy continues to grow, but the pace of expansion remains moderate, being constrained by ongoing weakness in household spending and a slide in housing construction. The good news is further evidence of an upturn in private business investment and stronger growth in public sector infrastructure spending which is providing support for the economy.

At face value, 2.8 per cent annual GDP growth rate is quite good, but the devil in the detail on how that growth has been registered is why there are some concerns about the sustainability of the expansion as 2018 looms.

Household spending remains mired with growth of just 0.1 per cent in the September quarter. It seems the very low wage growth evident in recent years, plus data showing a small rise in the household saving rate, is keeping consumer spending in check.

Making up well over half of GDP, household spending will be the vital element of the economy into 2018. If wages growth remains weak, there seems little prospect of a pick up in household spending. And if household spending remains weak, bottom line GDP growth will be relying on a strong expansion in business investment and public sector demand.