Is the Aussie economy back on track for growth?

Fri, 04 Nov 2016  |  

This article first appeared on the Yahoo7 Finance website at this link: https://au.finance.yahoo.com/news/is-the-aussie-economy-back-on-track-for-growth-233144753.html 

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Is the Aussie economy back on track for growth?

The interest rate cutting cycle appears to be over. This is not because inflation is accelerating – on the contrary, inflation remains low and looks like staying low for some time. Rather, interest rates are on hold is because the RBA is looking at a range of indicators that are suggesting the economy will be stronger over the next year and that, in time, inflation will eventually lift and return to the target band.

In other words, in not cutting interest rates now, the RBA is speculating that the economy will be strong enough to drive inflation higher during 2017 and beyond.

The growth pick up scenario has some strong points behind it. Importantly, commodity prices are moving higher which, if sustained, will give a substantial income boost to the Australian economy over the next few years. The unrelenting strength in house prices, particularly in Sydney and Melbourne, is not cooling to any significant extent, which is boosting wealth and posing a threat to financial stability. The RBA would prefer to see house price growth weaken and an interest rate cut does not fit with that wish. It does not want yet lower rates to underpin further house price growth.

At the same time, business confidence and sentiment is rising strongly. The Dun & Bradstreet survey of business expectations is pointing to upbeat conditions into the first quarter of 2017. Expected sales, profits and employment are at multi-year highs which, if correct, will underpin the strongest economic conditions since the GFC.

The construction sector is poised for a strong 2017. Not only is dwelling construction running at record highs with a huge pipeline of work still to be done, but infrastructure and non-residential construction is also surging. New transport facilities, hotels, office blocks, schools and university campuses are being built at a rapid pace and it will take some time to build them. The construction sector itself looks like adding close to 1 per cent overall GDP in 2017 and probably into 2018, even if housing investment falls away.

If consumer demand can recover from the post-election doldrums, a scenario where GDP growth stays above 3 per cent is a distinct probability. If that is the case, there is scope for an improvement in the labour market and for the unemployment rate to edge lower. By this time next year, the unemployment rate is likely to be around 5 per cent.

There are still risks, as always. The US Presidential election, Chinese property and debt issues, Brexit and any number of global events could derail this path to stronger growth. But for now, the lift in commodity prices, a more optimistic business sector and generally favourable conditions will see the RBA sit on the side line for many months to come.

There is a growing possibility that the next move in interest rates will be up. It would be prudent for mortgage holders and the business sector to factor in the possibility of higher interest rates and not get too used to interest rates at these record low levels.

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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.

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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.