3 reasons to be spooked about the economy

Mon, 18 Jun 2018  |  

This article first appeared on the Yahoo 7 Finance website at this link: https://au.finance.yahoo.com/news/3013537-004842668.html 

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

3 reasons to be spooked about the economy

Optimism about the Australia economy is rapidly being eroded by the hard reality of a weakening in the labour market, falls in house prices, a tightening in credit and chronically low wages growth. The labour force data for May were not good news, even with the blip lower in the unemployment rate.

Employment rose a tepid 12,000 in May, with full time jobs dropping a chunky 20,600 which was offset by a 32,600 rise in part time roles.

The jobs bonanza of 2017 has turning into a jobs famine. In the four months since January, employment has risen by a total of just 26,000 at a time when the working age population has surged by over 110,000. In other words, the economy is generating jobs for less than a quarter of people being added to the workforce. The economy simply isn’t strong enough to create employment for the increase in population through immigration and natural increase.

Indeed, the average monthly increase in employment over the past four months has been a paltry 6,500, down from the 34,400 per month during 2017. At this rate, employment growth in 2018 will be lucky to reach 150,000.

Despite the softer employment trends, the unemployment rate edged lower in May, to 5.4 per cent, to match the low of late 2017. This continues the trend which has seen the unemployment rate at 5.4 to 5.6 per cent for every month since May 2017. Importantly, the underemployment rate rose to a near record high 8.5 per cent of the workforce. Underemployment measures people who have a job but would like to work more hours. If it rises or is elevated as it is now, it reflects a weak economy where employers are reluctant or unable to offer their staff more hours even though those staff are keen to work more.

Adding the unemployment and underemployment rates together gives a good guide to underutilisation in the labour market and the fact this is around 14 per cent of the workforce is a worry given the headwinds confronting the economy. It is higher than at the peak during the global crisis.

In these circumstances, it is extraordinarily difficult for wages growth to pick up, as both the Reserve Bank and Treasury are hoping and forecasting. There are just too many people looking for work or hoping to work more hours for workers to go to their boss and ask for a decent pay rise. In these circumstances, it is impossible to imagine the RBA hiking official interest rates. Indeed, as this column has been arguing for some time now, it wont take much weakness in the labour market in concert with ongoing low wages growth and inflation, for the RBA to move to cut rates.


This is where the next round of wage and inflation data will be so important. If, as is likely, they remain low and there is further evidence of falls in house prices, the RBA would move to trim interest rates despite its current rhetoric which is that the next move in interest rate “is likely to be up not down” but only “if” (and it’s a big if) the economy improves.

The next few months will be fascinating for economy watchers and the markets.

comments powered by Disqus

THE LATEST FROM THE KOUK

The RBA rolls the dice on house prices

Wed, 21 Nov 2018

This article first appeared on The Wire, the web page for FIIG, at this link: https://thewire.fiig.com.au/article/commentary/opinion/2018/11/19/rba-ignores-property-at-its-peril 

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

RBA ignores property at its peril

The RBA rolls the dice on house prices

The usually careful and well considered Reserve Bank of Australia is taking a huge gamble on the Australian economy into 2019 and 2020.

The RBA is betting that the current slump in house prices and dwelling approvals are orderly and will not have any material or lasting consequences for the economy. In fact, RBA Governor Philip Lowe believes the fall in Australian house prices “is good news”, “manageable” and “a welcome development”. Further, in its November Statement on Monetary Policy, the RBA suggested that house prices “have continued to ease gradually”, which is a remarkably bland assessment given that close to $400bn has been wiped off the value of Australian houses since the price peak in September 2017.

Governor Lowe and the RBA’s open indifference to what is a major shift in the $7trn valuation of residential property is bold.

Wealth and household spending – The link

While some cooling in house prices was always inevitable following the price boom in the four years to 2017, the price falls are getting close to a point where the loss of household wealth will impact household spending. The RBA itself and a bevy of global academic research show a link between changes in household wealth and growth in household spending.

How Labor’s plans to revamp negative gearing could put a floor on house prices and lower rents

Tue, 13 Nov 2018

This article first appeared on the Business Insider web page at this link: https://www.businessinsider.com.au/labor-negative-gearing-impact-housing-comment-2018-11 

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

How Labor’s plans to revamp negative gearing could put a floor on house prices and lower rents

The economic policy debate over Labor’s plans to overhaul the negative gearing rules is hotting up.

It is an important debate on a policy change that will have implications for the housing market, particularly for first home buyer and investor demand.

The government is claiming that the negative gearing change will “take a sledgehammer”, “smash” and “punish” everyone in Australia. Treasurer Josh Frydenberg says that under Labor, “your home will be worth less and renters will pay more.”

It is a frightening scenario for property obsessed Australians with the value of all dwellings in Australia estimated to be around $7 trillion.

But is it true? What are the facts about the current housing cycle and how will Labor’s plans to revamp negative gearing impact the housing market?