Why concern is mounting for Australia's economic outlook

Fri, 08 Jun 2018  |  

This article first appeared on the Yahoo7 Finance web site at this link: https://au.finance.yahoo.com/news/concern-mounting-australias-economic-outlook-032051438.html 

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Why concern is mounting for Australia's economic outlook

The latest flood of economic data was more of the same – mixed, with a few snippets of good news offset by bits of weaker news. That said, there is general agreement about the unfolding risks that are pointing to more downs than ups in the period ahead.

The GDP data were reasonable – annual economic growth of 3.1 per cent over the year to the March quarter is around the growth rate that Australia should aim for. But such is the saw-tooth nature of the quarterly data (the last five quarterly GDP growth rates have been 1.0, 0.5, 0.5, 1.0 and 0.3 per cent) that next quarter, annual growth is likely to slip back a few notches. It is also worth noting that the average rate of annual GDP growth since the end of 2007 has been 2.5 per cent which is a long way from what should be registered if the economy was doing well in a sustained fashion. Another quarter or two of 3 per cent plus GDP is needed to confirm the economy is finally into a stronger growth path.

And this is where the concerns lie.

There is growing caution about the economic outlook largely as a result of the risks to household spending.

The level of household savings has dropped to a 10 year low. It seems spending growth is being sustained by lower savings which are in part offsetting falling wealth and weak wages growth. While the Reserve Bank of Australia is comfortable with the recent falls in house prices, there is a clear economic overlap in house price momentum, household wealth and spending.

That overlap goes along the lines that when house prices are strong, many home owners are wealthy and as a result, they are able to build their spending either by saving less or borrowing against their appreciating asset. Until recently, household spending in Sydney and Melbourne was amongst the strongest in Australia and this was where house prices were strongest. In Perth, conversely, where prices have been weak for several years, household spending was particularly weak.

Since late last year, house prices have dropped around 4.5 per cent in Sydney and by close to 2 per cent in Melbourne. This has coincided with a slowing in retail sales in NSW and Victoria which is why the pace of overall economic growth may ease back over the second half of 2018 and into 2019.

It is also important to note that wages growth, the other critical driver of consumer spending, remains mired near record lows around 2 per cent. This is undermining the ability of consumers to increase their spending. With the recent data flow confirming weak retail spending, a lull in dwelling construction, well contained inflation and a potential loss of growth momentum from the global economy, it is easy to see why the Reserve Bank of Australia has not followed through and delivered an interest rate rise.

While business expectations are strong, as measured in both the illion and NAB business surveys, it is not translating to a lift in business investment which is a vital element of any strongly performing economy. Suffice to say, the economy is doing reasonably well but is still not strong enough to drive a lowering in the unemployment rate which has actually edged up in recent months.

The jury is out whether the economy can sustain the good news in areas like GDP growth and business expectations, or whether low savings, weak wages, and a slide in housing will drag it lower.

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Don’t look now – you are almost certainly poorer than a year ago

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Falling dollar reflects global concern all is not well in the Australian economy

Mon, 07 Jan 2019

The article first appeared on The Guardian website at this link: https://www.theguardian.com/business/2019/jan/03/falling-dollar-reflects-global-concern-all-is-not-well-in-the-australian-economy 

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Falling dollar reflects global concern all is not well in the Australian economy

The Australian dollar was hit hard overnight, Australian time, slumping below 70 US cents before a sharp and more extreme move saw it temporarily crash to a low of 67.40 US cents. It subsequently recovered marginally, but remains weak at around 69.40 US cents.

Rather than focus on the micro aspects of minute-by-minute or hour-by-hour moves in the dollar, which can be more noise than substance, the trend for the dollar over the past year has been down.

In January 2018, the Australian dollar was trading at 81.50 US cents.

There is increasing concern from global investors that all is not well with the Australian economy. Policy is in a do-nothing phase. Entrenched low wages growth is hampering growth in household spending. This is being complemented, in a negative way, by a sharp fall in wealth as house prices drop and the share market weakens, both of which will be a negative for the economy during 2019. This is because householders are simply not getting the income growth nor wealth accumulation needed to allow them to keep spending at a rate that will see the economy expand at a pace that will generate upside wage and inflation momentum. Strategies aimed at reducing debt and paring back new borrowings mean, by definition, weaker economic growth over the near term.