Ok, it’s time to put my neck on the chopping block and make some forecasts for the economy and financial markets for 2019.
While I agree with my good friend Con Michalakis, market guru and CIO of State Super, that point forecasts on a calendar year basis are largely an artefact of the calendar and do not meet the demand of serious investment strategy, I do find it a useful discipline to make such forecasts each year. These forecasts capture where my analysis and judgment reveal which fundamentals are at greater risk of moving a particular way and most importantly, what this might mean for markets.
For me, the broadest themes for Australia in 2019 are on going sub-trend economic growth, while wages and inflation will remain disappointingly low. The RBA will finally succumb to facts on the economy and will cut interest rates to below 1 per cent in the latter part of the year and the Australian stock market, which has been a dog in recent times, will surge, rising perhaps 20 per cent by the end of the year. Bond yields are likely to fall further in the first part of the year, although a lot of the rally I was looking in 2018 for has already occurred.
There might be another moderate yield reduction the mid to longer end of the curve, but once the RBA finally gives a bit of monetary policy stimulus, the yield curve will steepen in the latter part of 2019.
Now some details.
This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/smoking-levels-continue-plummet-210432040.html
Smoking levels continue to plummet
Some good news on health – Australians are smoking less with the amount of tobacco consumed dropping to a record low in the September quarter 2018, and this includes data back to 1959 when Australia’s population was about 60 per cent below the level of today.
The peak consumption of tobacco came in the mid-1970s. Since then, there has been an unrelenting fall, with the timing of the downturn broadly coincided with the increasing prominence given to the link between smoking and early death and a range of government regulations aimed at reducing smoking rates.
Most recently, the introduction of plain packaging laws, together with hefty increases in excises – taxes in other words – has continued to drive the consumption of tobacco lower. The decline in the volume of tobacco consumed in Australia has crashed a staggering 24.4 per cent since the plain packaging laws were introduced at the end of 2012. This is despite population growth of around 8.5 per cent over that time.
Factors other than the introduction of plain packaging laws were also driving smoking levels lower – as noted, the sharp rise in excise taxes, many years of health awareness, tobacco advertising bans, restricting smoking in public places and even the fact many smokers have died and therefore are not buying tobacco products are all driving smoking to record lows.
This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/35-house-price-crash-unlikely-201301480.html
Why a 35% house price crash is 'very unlikely'
Australian house prices dropped again in the September quarter to be 2.8 per cent below the December quarter 2017 peak, based on the Australian Bureau of Statistics dwelling price series. In many respects, the data is old news – the comprehensive Corelogic house price series for November has already been released and they show further price falls in the last two months.
House price bet
Why the ABS dwelling price series matters, to me at least, it that it forms the basis of the bet on house prices I made in September with Tony Locantro, Investment Manager with Alto Capital in Perth.
Tony and I had a bet that at any stage between now and the time the December quarter 2021 dwelling price data are published by the Australian Bureau of Statistics, the price index for any of Sydney, Melbourne or the aggregate eight capital cities prices is down 35.0 per cent or more, I will give Tony $15,000 cash. Conversely, if by the time the December quarter 2021 data are published and the peak to trough decline is 34.9 per cent or less in Sydney, Melbourne and the eight capital cities, Tony has to give me $2,500.
These generous odds and benchmark for the 35.0 per cent price fall that I offered Tony reflected the absurd nature of a forecast from DFA’s Martin North to the effect that his forecast was for house prices to “drop 40 to 45 per cent over the next three years or so”.
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
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.
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.
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
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.
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
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.
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
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.
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
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?
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.html
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.