Is the Aussie economy on the rocks?

Fri, 01 Jun 2018  |  

This article first appeared on the Yahoo7 Finance website at this link: https://au.finance.yahoo.com/news/aussie-economy-rocks-050403466.html 

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Is the Aussie economy on the rocks?

I often wonder why people who analyse and comment on the economy don’t keep up to date with unfolding events.

Economics is a wonderful thing. It is vibrant, it changes every week, every month and every quarter as fresh news on inflation, employment, consumer spending, housing, business investment and a whole host of other variables are released. The reason this is important is that the recent, up to date information on the Australian economy is, all of a sudden, disconcerting.

While 2017 did see the strongest growth in employment on record, with an average increase in employment of 34,600 a month, in the three months to April 2018, the averAge monthly increase WAs just 4,800. This has seen the unemployment rate rise from what was a 5 year low of 5.4 per cent to 5.6 per cent.

The labour market has moved on from 2017.

What’s more, the ANZ job advertisement series, which provides a good guide to future trends in the labour market, has fallen for the last three months.

It is not just the labour market where there is some concern.

House prices are still falling. From the peak in October 2017, the Corelogic measure of house prices has dropped by around 2 per cent and there are no signs of the decline being arrested. While a 2 per cent fall after such strength is not yet a concern and the falls are not precipitous, there seems little doubt that further price weakness is on the cards. Housing auction clearance rates are low and banks are continuing to tighten their lending standards for new customers. There is little to suggest a reversal in the house price falls any time soon.

Retail sales are also losing momentum. Having risen 0.8 per cent in real terms in the December quarter 2017, they rose a paltry 0.2 per cent in the March quarter. Consumers are feeling the pinch from a weaker jobs market, low wages growth and high debt levels.

Areas of the economy where they have been positive signs, namely non-mining investment and public sector infrastructure spending, are not strong enough to overcome the weakness in these other areas to ensure bottom line growth in the economy is on track to reach let alone exceed 3 per cent. Unless there is a surprising and major upswing in business investment, the economy will likely remain soggy for a while longer.

For now, most economists including those at the Reserve Bank, are judging the economy to be doing well, with growth strong enough to engineer lower unemployment, raise wages growth and higher inflation. The recent facts suggest they are either looking at the hard news through rose coloured glasses or are paying little attention to run of recent facts.

Over the next 10 days or so, there will be a deluge of data which will provide the basis for a reassessment of economic conditions. By the end of next week, the market and the RBA will have before it updated and fresh news on GDP growth, retail spending, house prices, capital expenditure, credit growth, inflation, public sector spending, exports and international trade. There will, of course, be additional news from around the world.

This stock take on the economy will allow for a recasting of views on the economy. The bulk of these data will need to be surprisingly strong for there to be optimism about the economy into the second half of 2018.

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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.