Stephen Koukoulas

Stephen Koukoulas

Thursday, 22 February 2018 09:12

Could tax cuts threaten our AAA credit rating?

This article was written for The Wire, a publication produced by FIIG. This link is here: https://thewire.fiig.com.au/article/commentary/opinion/2018/02/16/could-tax-cuts-threaten-our-aaa-credit-rating

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Could tax cuts threaten our AAA credit rating?

In just over 10 weeks, on 8 May to be exact, Treasurer Scott Morrison will deliver the 2018-19 budget - almost certainly the last before the next election.

The budget is likely to offer mixed news, but encouragingly remain on target to a small budget surplus in 2020-21.

Importantly, from both an economic and political perspective, there has been some upside to government tax receipts since the mid year economic and fiscal update was published in December. This is largely the result of company tax receipts running strongly as profits and therefore tax payments have been buoyed by higher commodity prices, boosting the financial position of mining companies. Strong employment growth has kept income tax payments flowing freely to Treasury, despite soft wages growth.

If the current speculation from Canberra is correct, and it appears to be well founded, the government will use the windfall revenue gains to promise income tax cuts on top of the company tax cuts it is currently trying to get through parliament.

Tax cuts stimulate growth

While the timing and magnitude of the income tax cuts is yet to be revealed, there is little doubt that there will be something of a sugar hit to the economy if the Coalition win the election and the tax cut legislation is passed. There will plainly be more cash in the economy rather than in the government coffers at the time the tax cuts are delivered. This would support bottom line economic growth and at the margin, add to inflation. Financial markets would also be impacted, if the US is any indication.

Wednesday, 21 February 2018 08:07

When next for the Aussie dollar?

This article first appeared on the Yaho7 Finance web site at this link https://au.finance.yahoo.com/news/next-aussie-dollar-041651007.html 

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What next for the Aussie dollar?

It has been a turbulent few weeks for financial markets, including for the Aussie dollar. The AUD has been on a roller coaster, having reached a high of 81.2 US cents in late January and a low of 77.7 US cents about 10 days ago having traded at a low around 75 cents in December.

It is currently trading around 79.5 US cents, with the market divided about which direction will break over the next 12 months.

Foreign exchange markets are driven by many factors. For the Australian dollar, there are some powerful influences that have shown to determine its fortunes. One of those is the gap in interest rates between Australian and the rest of the world. When Australian interest rates are substantially above those of the rest of the world, there is often a bias from investors towards the AUD which drives it higher. When the interest rate gap compresses, the appeal of the AUD is reduced.

Which brings us to a fascinating situation at the moment, when we compare Australia and the US. With the US Federal Reserve embarking on a series of interest rate increases and the Reserve Bank of Australia squarely on hold, the interest rate gap between Australia and the US is effectively zero. This is not only for the official cash rate, but also for 10 year government bonds. This is a rare occurrence and prospective changes in the interest rate gap is one reason why the risks favour the AUD falling back towards 70 US cents over the next year or so.

Tuesday, 20 February 2018 12:04

Sydney house prices going from hero to zero

According to the wonderful Corelogic house price series, Sydney house prices have grown by 0.00 per cent over the past year.

This annual result masks what are some weaker trends for the Sydney housing market including the fact that prices have fallen 3.8 per cent from the September 2017 peak. In other words, a dwelling that was $1,000,000 in September is now worth around $962,000, a drop of $38,000.

Is this a problem?

Not yet.

Could it become a problem?

This article first appeared on the Yahoo7 Finance website at this link: https://au.finance.yahoo.com/news/2447510-043200008.html 

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Why the jobs market is like baked beans on toast

The January labour force data were a bit like baked beans on toast.

Not horrible, but hardly the sort of thing that is going to inspire joy and optimism about the future. The unemployment rate remains at 5.5 per cent which is significantly above most estimates of full employment for Australia and is exactly the same as it was in May 2017.

In other words, there has been no progress in reducing Australia’s stubbornly high unemployment rate since the budget 8 months ago even though the government likes to crow about the level of job creation in recent times. Despite this bluster and noisy rhetoric about job creation, the fact is the unemployment rate remains uncomfortably high and no one is doing anything about it.

This article was written for The Wire, a publication produced by FIIG. The link is here https://thewire.fiig.com.au/article/commentary/opinion/2018/02/13/australia-has-three-problems-chronic-inflation-low-gdp-and-falling-house-prices 

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Australia has three problems – chronically low inflation, low GDP and falling house prices

If the latest forecasts from the RBA’s February Statement on monetary policy prove to be correct, underlying inflation will not hit the mid point of the RBA target for at least the next two years, which is as far as the current RBA forecasts extend. The RBA inflation forecasts are predicated on annual real GDP growth registering what seem at face value, decent levels around 3.25 per cent. If this figure comes to fruition, inflation will still remain low, as the RBA notes. Implicitly, GDP growth needs to be materially faster – say 3.75 per cent per annum – for inflation to accelerate to the middle of the target band.

Conversely and obviously, if there is any slight disappointment on the growth outlook – perhaps with housing being weaker than anticipated, or global conditions undershooting the current rosy outlook that results in annual GDP hovering around 2.75 per cent rather than at 3.25 per cent – the risk on those already weak inflation forecasts from the RBA will be squarely to the downside.

The December quarter CPI figure confirmed inflation was running dead. Underlying inflation is actually decelerating with an annualised increase of just 1.6 per cent in the second half of 2017, down from 2.1 per cent in the first half of the year.
While there is considerable debate why this inflation undershoot has been occurring, one simple point is that economic growth in Australia has been too low for many years. Since the start of 2013, the average annual rate of real GDP growth has been a tepid 2.4 per cent. This is a stunning 0.75 per cent per annum below what was considered the long term trend, which means that a large output gap has been accumulated over the time.

The hangover of the global financial crisis is still with us

With the economy underperforming over all those years, it is little wonder that over 13.5 per cent of the labour force is ‘underutilised’ – either unemployed or underemployed.

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.

Thursday, 01 February 2018 19:03

Barnaby Joyce and the economics of housing

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.

Thursday, 01 February 2018 11:13

Is negative gearing about to change?

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.

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.

 

 

Wednesday, 24 January 2018 17:00

Podcast on the economy: The issues for 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.

 

THE LATEST FROM THE KOUK

Don’t fall for the spin - Scott Morrison’s budget surplus is no certainty

Thu, 06 Dec 2018

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 

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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.

Change of view on monetary policy

Wed, 05 Dec 2018

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.