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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It’s time to end the “strong economy” propaganda

Thu, 20 Jun 2019

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/its-time-end-strong-economy-propaganda-230414837.html 

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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.

Time will tell.

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.