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 

--------------------------------------------------

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.

comments powered by Disqus

THE LATEST FROM THE KOUK

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 

--------------------------------------- 

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.