Do we need to be worried about Australia's economic outlook?

Tue, 22 May 2018  |  

This article first appeared on the Yahoo7 Finance web site at this link: https://au.finance.yahoo.com/news/need-worried-australias-economic-outlook-060611703.html 

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Do we need to be worried about Australia's economic outlook?

The Reserve Bank of Australia reckons that the next move in official interest rates is more likely to be up than down. RBA Governor has said so in recent weeks as he talks up the prospects for the economy over the next year or two.

This is disconcerting news for everyone out there with a mortgage or a small business loan, especially in a climate where the business sector is doing it tough and when wages growth is floundering near record lows. The good news is that the RBA is likely to be wrong and the next move in interest rates could be down, such is the run of recent news on the economy. Failing an interest rate cut, the hard economic facts suggest that any interest rate rises are a long way into the future and if they do come, there will not be all that many.

At this point, it is important to bring together the issues that would need to unfold to see the RBA pull the lever to hike interest rates.  At the simplest level, the start of an interest rate hiking cycle would need to see annual GDP growth above 3.25 per cent, the unemployment rate falling to 5 per cent and less, wages growth lifting towards 3 per cent and more and underlying inflation increasing to 2.5 per cent.

This is where the RBA expectation for higher interest rates is on very thin ice.

In terms of GDP growth, there is nothing in the recent data to suggest 3,25 per cent is on the cards. In two weeks, the March quarter GDP data will be released and they are likely to show annual growth around 2.75 per cent, which is much where is has been for the last few years. With retail sales also soft, building approvals trending lower, some government infrastructure projects coming to an end and net exports more neutral than positive over the next year, bottom line GDP is set to remain below 3 per cent right through to 2019.

The recent labour force data are showing the unemployment rate going up. It reached 5.6 per cent in April, to be higher than it was in May 2017. With job advertisements starting to track lower, it seems more likely the unemployment rate will hit 6 per cent, not the 5 per cent rate the RBA is banking on.

This weakness in employment will inevitably feed back into wages, which are also showing signs of slowing, not picking up. Over the last two quarters, annualised wages growth has been just 2.0 per cent, down from 2.2 per cent recorded in the June and September quarters 2017. Weak wages growth is hurting consumer spending and holding back bottom line growth. In terms of inflation, it remains well in check with sub-trend economic growth, rising unemployment and weak wages all feeding into a below-target inflation rate.

At one level, it is to be hoped the RBA is correct and the economy gains momentum, wages growth increase and eventually interest rates need to rise. That is because the economic news would be universally good.

The recent facts suggest this is a long shot.

If the economy keeps muddling along much as it has over the past year or so, the RBA will be on hold for a m=long time to come. If there is any downside at all from the current sluggish growth, rising unemployment, low inflation dynamics, the RBA will cut interest rates.

It wont happen soon, but the odds are slowly narrowing of a move before year end.

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Why Australians have lost $300 Billion this year

Mon, 22 Oct 2018

This article first appeared on the Yahoo 7 website at this link: https://au.finance.yahoo.com/news/3665708-004156966.html 

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Why Australians have lost $300 Billion this year

The total wealth of Australians has dropped by close to $300 billion since the start of 2018.

How much of that is yours?

The fall in house prices and now the slump in the stock market is undermining the wealth of Australian householders.

This is an important trend given the solid link between the change in wealth and household spending. Numerous studies show that when wealth increases, growth in household spending is faster than it would otherwise be. It appears that householders view their extra wealth in a manner that sees them lower their other savings or use that wealth as collateral for additional borrowing fund extra consumption. They may even ‘cash in’ their extra wealth and use those gains to fund additional spending.

When they observe falling wealth, experience weak wages growth and realise their savings rates are perilously low, they will adjust their spending – down.

Labor almost home, not quite hosed

Mon, 22 Oct 2018

The extraordinary vote in the Wentworth by election, with the 18 or 19 per cent swing against the Liberal Party, presents further evidence that the Morrison government is set to lose the next general election.

There is nothing particularly new in this with the major nation-wide polls showing the Liberal Party a hefty 6 to 10 points behind Labor.

The election is unlikely to be held before May 2019, which is a long 7 months away. A lot can happen in that time but for the Liberal Party to get competitive, but for this to happen there needs to be a run of extraordinary developments.

In the aftermath of the Wentworth by election, the betting markets saw Labor’s odds shorten.

While the odds vary from betting agency to betting agency, the best available odds at the time of writing was $1.25 for Labor and $4.00 for the Coalition.

If, as most now seem to suggest, Labor is ‘across the line’, $1.25 is a great 25 per cent, tax free return for 7 months ‘investment’. Yet, punters are not quite so sure and seem to be holding off the big bets just in case something out of the ordinary happens.

While some segments of the economy look quite good, at least on face value – note the unemployment rate and GDP – others that probably matter more to voters – husong, share prices, wages and other high-frewquency cost of living issues are all looking rather parlous. And none of these are likely to change soon.

There is an old saying for punters – odds on, look on. But $1.25 for Labor seem great value.