Stephen Koukoulas

Stephen Koukoulas

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/main-driver-cash-rate-cut-itll-happen-soon-200635247.html 

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This is the main driver for a cash rate CUT, and it'll happen soon

The prospect that interest rates will be lowered within the next few months is already starting to impact on the economy.

Here’s how.

Around the middle of 2018, financial markets were expecting the RBA to hike official interest rates to 1.75 or 2 per cent over the course of the next 18 months or so. If proof was needed that investors and economists can get it wrong, markets are now pricing in official interest rates to be cut towards 1 per cent over the next 18 months.

The about face has been driven by a raft of disappointing news on the economy, most notably the fall in house prices, the free-fall in new dwelling building approvals and a slump in retail spending growth.

Business confidence has also taken a hit and job advertisements have been falling for eight straight months. Ongoing low inflation and increasing signs of a slowdown in the global economy have simply added to the case for this dramatic change in market pricing.

I gave a short statement to the House of Representatives Economics Committee on refundable franking credits in Sydney on 8 February 2019.

Below are the notes I used for that Statement which boiled down to two issues, the cost to the budget and how the policy is distorting investment decisions from investors and lazy financial planners.

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Tax policy is always riddled with trade offs.

No government wants to tax anyone more than it needs to, nor should it impose a tax regime that is unfair if it means cuts to services, a heavy tax impost on others in the community or adds unnecessarily to the budget deficit and government debt.

Labor’s policy on refundable franking credits will impact the budget bottom line by more than $5 billion a year.

Without the change, this $5 billion, or $100 million a week, means less money is available for the government to provide health care, roads, education, disability assistance and defence.

It is disconcerting that every dollar of refundable franking credits is currently borrowed by the government.

This article first appeared on the Yahoo Finance web site at this link: https://au.finance.yahoo.com/news/heres-australias-1-5-interest-rates-high-002038269.html 

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Here's why Australia's 1.5% interest rates are too high

Australians love talking about interest rates and the bulk of economic commentary day-to-day is about whether or not the Reserve Bank of Australia will be putting them up, or down or leaving them steady at their next monthly meeting. This is no doubt linked to the huge interest of most Australians in house prices and the fact that household debt levels are amongst the highest in the world.

A small change in interest rates can have a significant impact on those with large mortgages.

Are interest rates too high or too low?

Having watching the RBA over the last 30 years or so, I have learnt a few lessons when it comes to working out whether interest rates are too high, too low or just right.

These lessons boil down to the following observable and easily tested facts on the economy.

This article first appeared on the Yahoo Finance web site at this link: https://au.finance.yahoo.com/news/speech-rba-governor-needs-give-next-week-200301848.html 

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If I was RBA Governor, this is the speech I would give next week

The RBA Governor Phillip Lowe is giving a speech at the National Press Club next week, no doubt to recast the RBA’s view on the economy and to present its up-to-date thinking on monetary policy. This will include whether it still reckons the next move in official interest rates “is likely to be up”.

I don’t know what Dr Lowe will say or how the view of the RBA has changed since it last went public with its upbeat views on the economy in early December, but if I were RBA Governor, this is what I would say:

"The economy has not performed as we were expecting.

This is not to say that the economy is entering a period of trouble, far from it. But the economy is falling short of the optimistic outlook the RBA held for the bulk of the last year. The main areas of surprise are related to the housing downturn, both in terms of house prices and new construction, and the flow through of these trends to household consumption spending.

In addition to weaker than forecast GDP growth in the September quarter, the severity of the housing downturn is forecast to reduce GDP growth in 2019 and 2020. The downward revision to the forecast for household consumption growth is not being offset by unexpected strength elsewhere, hence the material change to the Bank’s overall growth outlook.

Prime Minister Scott Morrison has given a commitment that a Coalition government would create 1.25 million new jobs over the next 5 years.

Specifically, Mr Morrison tweeted, “I’m making a new pledge for our Government, to see 1.25 million jobs created over the next 5 years”.

This is a bold claim on any measure. Alas for Mr Morrison, the claim is at odds with his Treasurer's recent MYEFO estimates which included a series of forecasts and projections for employment growth over those 5 years. It is easy to cross check. Using Treasurer Josh Frydenberg’s forecasts in MYEFO, cumulative employment growth over the next 5 years will be just 954,000, some 296,000 below the figure that Mr Morrison seems to have plucked out of the air.

The 954,000 is calculated the following way:

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/australia-fallen-recession-200014477.html

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Has Australia fallen into a per capita GDP recession?

 There is no doubt the Australian economy was weaker in late 2018 than it was during the first half of the year. It seems to have kicked off 2019 on a similarly weak note.

Recent economic news has been unambiguously poor and it follows the dismal GDP results released last month which showed per capita GDP falling 0.1 per cent in the September quarter. That was a poor result and forced most thinking economists to revise down their assessments of Australia’s economic health. If the upcoming December quarter GDP result, which is due for release in early March, reveals another drop in per capita GDP, the economy on a per capita basis will be going backwards.

This, quite clearly, is not good news.

It means living standards for the average Australian are falling and it poses questions about the current stance of economic policy.

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/will-economic-data-influence-election-date-200237239.html

The data flow could influence the timing of the election

Ready, get set!

There will be a Federal election within the next four months and the main question is the exact date when we will go to the polls. The current speculation focuses on three dates – relatively early on 2 March or nearer full term on 11 or 18 May.
The decision will be taken by the Prime Minister, Scott Morrison, over the next few weeks.

One issue which will undoubtedly be critical to his thinking on the timing of the poll will be the economic data flow that will be released during the election campaign.

Just think – getting a poor GDP result or a rise in unemployment or weak wages data slap bang in the middle of the campaigning. It could be enough to derail the election strategy of the government and further erode its economic credentials. It is also important because the economy is clearly weakening. House prices are falling sharply, destroying the wealth of home owners, wages growth remains weak, the stock market is sick and consumer spending is unsurprisingly slow. There is also evidence in the various job advertisement series that the labour market is cooling which could see the unemployment rate creep up in the months ahead.

2 March Vs 18 May

The economic calendar suggests Mr Morrison would be wise to call the election for 2 March.

Here’s why.

This article first appeared on the Yahoo Finance web page at this link: https://au.finance.yahoo.com/news/dont-look-now-almost-certainly-poorer-year-ago-211934583.html 

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Don’t look now – you are almost certainly poorer than a year ago

I am sorry to kick off the new year with some gloomy news of your finances.

It is never nice to discuss how much money you have lost, but if you are a home owner in Sydney, Melbourne, Perth or Darwin and if you have a superannuation nest egg, the odds are you are less wealthy today than you were a year or two ago.

Here are some uncomfortable facts.

The Australian stock market, where the bulk of your superannuation assets are likely to be invested, has slumped 11 per cent since August, reducing the value of stocks by around $200 billion.  No doubt your superannuation has suffered part of this loss.

At the same time, home owners in Sydney, Melbourne, Perth and Darwin are seeing the value of their homes getting crunched.

Here are some examples.

The article first appeared on The Guardian website at this link: https://www.theguardian.com/business/2019/jan/03/falling-dollar-reflects-global-concern-all-is-not-well-in-the-australian-economy 

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Falling dollar reflects global concern all is not well in the Australian economy

The Australian dollar was hit hard overnight, Australian time, slumping below 70 US cents before a sharp and more extreme move saw it temporarily crash to a low of 67.40 US cents. It subsequently recovered marginally, but remains weak at around 69.40 US cents.

Rather than focus on the micro aspects of minute-by-minute or hour-by-hour moves in the dollar, which can be more noise than substance, the trend for the dollar over the past year has been down.

In January 2018, the Australian dollar was trading at 81.50 US cents.

There is increasing concern from global investors that all is not well with the Australian economy. Policy is in a do-nothing phase. Entrenched low wages growth is hampering growth in household spending. This is being complemented, in a negative way, by a sharp fall in wealth as house prices drop and the share market weakens, both of which will be a negative for the economy during 2019. This is because householders are simply not getting the income growth nor wealth accumulation needed to allow them to keep spending at a rate that will see the economy expand at a pace that will generate upside wage and inflation momentum. Strategies aimed at reducing debt and paring back new borrowings mean, by definition, weaker economic growth over the near term.

A well-established and immutable rule of market and economic forecasting is never to gloat when you happen to get a forecast right. There are many reasons for this, not least the certainty that other forecasts over many years have been wide of the mark, a fact that brings a balance to the forecasting debate.

That’s said, it is always useful to review the big forecasts and learn why your forecasts were right or wrong and to use this experience and knowledge to refine and develop future forecasts.

I do this every year - whether good or bad - and here we go with an assessment of the forecasts I made at the start of 2018 for the year ahead.

It’s actually a little embarrassing to do my annual assessment, because they were fantastically good. Anyone following those forecasts would have made some good money, which, frankly, is what these forecasts are all about. I would be delighted to see if anyone out there can find someone with a better track record for the year, so please let me know.

THE LATEST FROM THE KOUK

It’s time to end the “strong economy” propaganda

Thu, 20 Jun 2019

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/its-time-end-strong-economy-propaganda-230414837.html 

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It’s time to end the “strong economy” propaganda

For the last year or so, it has been obvious to anyone with an open mind that the economy is in trouble. Unfortunately, the government and the Reserve Bank not only ignored this growth slump, but they ran a propaganda campaign saying the economy was “strong”, that unemployment would keep falling and wages growth was poised to pick up.

It might have been politics that lead the RBA and Treasury to this view with the recent election swinging on the economic credentials of both major parties. Ahead of the election, the RBA and Treasury were loathe to undermine the government with an honest assessment of the rapidly spreading economic problems.

It is possible that the forecasts were a simple error, which sometimes happens when an external shock hits the economy.

Either way, things are so bad in the economy right now that forecasters are rushing to out-do each other on how low interest rates will go in this cycle. Some are canvassing negative interest rates, printing money or the need for a fiscal policy boost if the economy remains in its economic funk.

Time will tell.

The range of forecasts that where regularly produced by the government (Treasury) and the RBA up until very recently were unambiguously optimistic. The forecasts ignored all hard data on the economy, which suggests it may have been a political strategy to remain upbeat, rather than it being a clumsy forecasting error.

An update on my house price bet with Tony Locantro

Thu, 20 Jun 2019

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/house-prices-are-still-dropping-but-bottom-sight-210000929.html 

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An update on my house price bet with Tony Locantro

It is difficult to think of a bigger issue that gets Australians fired up than house prices.Regular readers will know that back in September 2018, I made a bet on house prices with Tony Locantro, a fired-up Investment Manager with Alto Capital in Perth.

Tony wont mind me saying this, but he is what is called an ‘uber bear’ on house prices – he reckons prices are grossly inflated and are overdue to collapse. On the other hand, I reckon there is a cycle and that after the surge up to 2017, house price falls were inevitable, but that the decline would last only a couple of years and would not be too severe.

The bet was framed around a peak-to-trough fall in prices of 35.0 per cent in either Sydney, Melbourne or the 8 capital cities measure used by the Australian Bureau of Statistics. If prices fell by more than 35 per cent at any stage from the peak until the end of 2021, Tony would win, if the fall was less than 35 per cent, I would win.

Simple.

That background is important because the ABS just released the official dwelling price data for the March quarter 2019.

In the quarter, dwelling prices fell 3.0 per cent in the 8 capital cities and dropped 3.9 per cent in Sydney and 3.8 per cent in Melbourne.