Stephen Koukoulas

Stephen Koukoulas

This article first appeared on The Guardian website at this link: https://www.theguardian.com/commentisfree/2018/mar/19/the-next-election-is-as-much-about-labor-v-liberals-as-young-v-old 

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The next election is as much about Labor v Liberals as young v old

For younger Australians who are increasingly disaffected and angry about the growth of intergenerational inequality in housing, superannuation and education, there will be a clear choice at the next election.

With its latest policy on the tax treatment of dividend imputation, Labor has added to its policy agenda that promises to tackle some of the intergenerational unfairness that has built up in recent decades. It follows Labor’s proposed reforms on housing and education which should give young people something to be pleased about and a motivation to turn up at the ballot box when the election is held.

For the so-called baby boomers, generally those at or near retirement, Labor’s policies are likely to generate disaffection and shore up their support for the Coalition.

Specifically, the Labor party’s policies on negative gearing will help make housing more affordable, while its plan to adjust the tax treatment of dividends that currently favour well-off baby boomers with shares in their superannuation portfolios will free up cash for spending in education. This in turn will allow younger people to have greater access to gaining a skill, training and education without the burden of huge HECS debt.

These policies should set a clear divide between the young and old, between Labor and the Coalition at the next election.

This article first appeared on the Yahoo7 Finance website at this link: https://au.finance.yahoo.com/news/australia-urgently-needs-interest-rate-cut-231554621.html 

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Australia urgently needs an interest rate cut

The Australian economy urgently needs an interest rate cut, or two, if there is to be a pick up in activity, lower unemployment, higher wages growth and for inflation to move back to the RBA target range.

The RBA last cut interest rates in August 2016 to 1.5 per cent, having dragged the chain to cut to even that level when the bulk of the industrialised world had already had the benefits of years of near zero interest rates and, in many cases, quantitative easing. This is not to say that Australia needed zero interest rates or QE, but official interest rates below 1.5 per cent a year or two earlier would have helped support growth and not seen Australia stand out like a sore thumb with a lack of progress on reducing the unemployment rate and returning the economy to optimal growth.

Of course, the RBA was worried about house prices. Its problem was its strong philosophical objection to regulatory changes to limit lending for housing, especially investor housing. Had it embraced these changes earlier, it would have been able to cut rates to help the business sector be the lynchpin of stronger growth while the housing market softened.

Thankfully, on the issue of changes to lending regulations, the RBA was left on the sidelines. APRA and other regulators imposed restrictions on bank lending which are now clearly having an impact on the housing market. 

This article first appeared on the Yahoo7 website at this link: https://au.finance.yahoo.com/news/heres-political-debate-tax-getting-hot-213307700.html 

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Here's why the political debate over tax is getting hot

Just about all economists agree with the general principal of budget management that the Federal budget should be in balance over the course of the business cycle and that the level of net government debt should be low enough to ensure the maintenance of Australia’s triple-A credit rating.

These big picture fiscal themes even have bipartisan support with both the Coalition and Labor arguing that they will both deliver a sound budget position when in government. But like someone planning to travel from Dublin to Cork, there are different routes that can be taken to get there. What is the best policy mix that will meet the end point of budget management of balanced budgets and low government debt?

In broad terms, there are two paths that the government can take to balance the budget and contain government debt.

One is to spend less money by cutting government funded services on education, health, roads, pensions and the like while keeping the tax base lower than it would otherwise be. Such a strategy can comfortably balance the budget as fiscal austerity trims the spending side.

The other way is to have tax laws to ensure there is enough revenue in the government coffers so that services can be provided to a large number of people at a high quality. If the tax system is progressive, the much of the revenue raise will be through fair means.

This article first appeared on the Yahoo7 Finance website at this link:  https://au.finance.yahoo.com/news/house-prices-fall-across-australia-worried-004714571.html 

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As house prices fall across Australia, should we be worried for our economy?

Are you a home owner?

If you are in Sydney, Perth and Darwin, you are losing money at a rapid rate.

In Melbourne and Canberra, prices are topping out and there is a growing risk that prices will fall through the course of this year. If your dwelling is in Brisbane or Adelaide, you are experiencing only gentle price increases, whilst the only city of strength is Hobart, where house prices are up over 13 per cent in the past year.

The house price data, which are compiled by Corelogic, are flashing something of a warning light on the health of the housing market and therefore the overall economy. For the moment, the drop in house prices has not been sufficient to unsettle the economy, even though consumer spending has been moderate over the past year.

The importance of house prices on the health of the economy is shown in the broad trend where the cities that have the weakest housing markets tend to have the slowest growth in consumer spending and are the worst performance for employment and the unemployment rate. The cities with the strongest house prices have strong labour markets and more robust consumer spending.

This article first appeared on the Yahoo7 Finance website at this link: https://au.finance.yahoo.com/news/trump-cause-next-global-recession-heres-233953884.html 

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Trump could cause the next global recession: here's how

The Trump trade wars threaten the global economy. This is not an exaggeration or headline grabbing claim, but an economic slump based on a US inspired global trade war is a distinct and growing possibility as it would dislocate global trade flows, production chains and bottom line economic growth.

Up until a few weeks ago, there was a strong enthusiasm for the economic policies of US President Donald Trump. Tax cuts and planned infrastructure spending were seen to be good for the US and world economies. US stocks and many around the rest of the world rose strongly, to a series of record highs. At the same time, bond yields (market interest rates) surged as the market priced in interest rate hikes and inflation risks from the ‘pro-growth’ policies. It was seen to be good news.

Very few, it seems, were worried about the consequences for US government debt and the budget deficit from this cash splash, especially when the US Federal Reserve was already on a well publicised path to hiking interest rates.

About a month or two ago, a few of the more enlightened and inquisitive analysts started to focus on the fact that the annual budget deficit under Trump was poised to explode above US$1 trillion with US government set to exceed 100 per cent of annual GDP.

A debt binge fuelled by tax cuts was a threat to the economy after the temporary sugar hit.

Wednesday, 28 February 2018 09:02

26 years and no recession – what might go wrong

This article first appeared on the FIIG website at this link: https://thewire.fiig.com.au/article/commentary/opinion/2018/02/25/26-years-and-no-recession-what-might-go-wrong 

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26 years and no recession – what might go wrong

 Australians should be justifiably proud of the fact that the last recession in Australia ended in the June quarter 1991, over 26 years ago. This means around half the current workforce has never had to deal with the pain and suffering – both financial and emotional – that a recession delivers.

While the economy is hardly on fire at the moment, it is pretty safe to say there is no material threat of a recession. Indeed, there are few identifiable issues that can be seen as genuine triggers for what some are suggesting is a long overdue recession.

As 2018 kicks off, business investment is rapidly recovering from the mining sector imposed slump and public sector spending is strong. These items alone will provide a foundation for the economy for the next year or two, also supported by the export sector, which should perform well following steady growth in the global economy. Despite moderate growth in household spending due to weak wages growth and high levels of household debt, it is still expanding and adding to bottom line GDP. In other words, it is not falling and offsetting the positive news in business investment and public spending.

For a recession to emerge as a material threat, household consumption has to fall, or business investment and public infrastructure spending has to reverse sharply, neither of which are currently on the radar.

Forecasting a recession is easy

Forecasting recessions is easy and many people seem to make a living out of it.

This article first appeared on the Yahoo 7 Finance website at this link https://au.finance.yahoo.com/news/heres-expect-2018-federal-budget-004452841.html 

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Here's what we could expect for the 2018 Federal Budget

Treasurer Scott Morrison is about to do cartwheels down the corridors of Parliament House, such is the unexpected improvement in the budget position over the past year.

A surprise surge in company tax collections, a lift in goods and services tax receipts and an undershoot in planned government spending has seen the forecast for the budget deficit for the first seven months of 2017-18 come in more than $6 billion lower than was assumed when the Mid-Year Economic and Fiscal Outlook was released in December. If this trend continues through to the end of the financial year, the budget deficit could fall to around $15 billion which would be the smallest deficit in the current cycle, that is, since the last budget surplus was recorded in 2007-08 and all of the improvement will have been driven by a surge in tax receipts.

More importantly, the improved budget momentum will almost certainly parlay through to the so-called out-years of the budget which will leave to smaller deficits and larger surpluses.

While there is always plenty of debate about the economic parameters underpinning the budget forecasts over the 3 or 4 years of the forward estimates, when Morrison hands down the budget on 8 May, he is likely to announce that budget position over the four years has markedly improved.

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?

THE LATEST FROM THE KOUK

My house price bet with Tony Locantro - an update

Mon, 01 Apr 2019

This article first appeared on the Yahoo Finance web page at this link: https://au.finance.yahoo.com/news/aussie-property-crash-looking-even-unlikely-heres-021138614.html 

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My house price bet – I’m very happy and getting ready to collect

I recently made a bet with Tony Locantro, Investment Manager with Alto Capital in Perth on the extent to which house prices would fall over the next three years.

Just to reiterate, the bet centred on Locantro’s view that prices would drop 35 per cent or more by the end of 2021 from the peak levels in 2017, a forecast that looked absurdly pessimistic given the raft of factors that influence house prices over the course of years.

For Mr Locantro to win the bet, house prices measured by the Australian Bureau of Statistics on a quarterly basis in either Sydney, Melbourne or for the average of the eight capital cities would need to fall by 35 per cent or more from the peak levels by the time the December quarter 2021 data are released. The ABS released the latest residential property price data last week which presents an opportunity to see how the bet is unfolding, admittedly with three years to go until it is settled.

As everyone knows, house prices are falling in most cities, reversing part of the boom over several decades.

Get ready for a cash rate cut in April

Mon, 25 Mar 2019

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/get-ready-cash-rate-cut-april-193244245.html

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Get ready for a cash rate cut in April

The data is in and it is compelling.

The Australian economy is faltering and the risk is that it will weaken further if nothing is done to address this decline.Not only has there been recent confirmation of a per capita GDP recession – that is, on a per person basis the economy has been shrinking for two straight quarters – but inflation is embedded below 2 per cent, wages growth is floundering just above 2 per cent, house prices are dropping at 1 per cent per month and dwelling construction is in free fall.

Add to this cocktail of economic woe an unambiguous slide in global economic conditions, general pessimism for both consumers and business alike and a worrying slide in the number of job advertisements all of which spells economic trouble.Blind Freddie can see that there is an urgent need for some policy action. And the sooner the better.For the Reserve Bank of Australia, there is no need to wait for yet more information on the economy.

It has been hopelessly wrong in its judgment about the economy over the past year, always expecting a growth pick up “soon”. Instead, GDP has all but stalled meaning that inflation, which is already well below the RBA’s target, is likely to fall further.In short, no. It is not like a 25 basis point interest rate cut on 2 April and another 25 in, say, May or June will reignite inflation and pump air into a house price bubble.

Such a claim would be laughable if there are any commentators left suggesting this.