Has Australia fallen into a per capita GDP recession?

Wed, 23 Jan 2019  |  

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/australia-fallen-recession-200014477.html

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Has Australia fallen into a per capita GDP recession?

 There is no doubt the Australian economy was weaker in late 2018 than it was during the first half of the year. It seems to have kicked off 2019 on a similarly weak note.

Recent economic news has been unambiguously poor and it follows the dismal GDP results released last month which showed per capita GDP falling 0.1 per cent in the September quarter. That was a poor result and forced most thinking economists to revise down their assessments of Australia’s economic health. If the upcoming December quarter GDP result, which is due for release in early March, reveals another drop in per capita GDP, the economy on a per capita basis will be going backwards.

This, quite clearly, is not good news.

It means living standards for the average Australian are falling and it poses questions about the current stance of economic policy.

In other words, with living standards falling, do policy makers have the right policies in place that will reverse this downturn and deliver a resumption in growth?

The short answer is ‘no’.

Policy settings are wrong for a scenario of stronger economy, including importantly per capita growth and a reflation of the economy. By way of background, the average annual rate of per capita GDP over the past 30 years have been 1.84 per cent or about 0.46 per cent per quarter. Population growth means that the long run trend growth for top-line GDP is over 3 per cent in annual terms and around 0.75 per cent on a quarterly basis.

Back to current economic conditions.

The data looks weak

The data flow for the December quarter looks weak, even with the population growing by about 0.4 per cent in the quarter.New car registrations are falling at an alarming rate and will mean both household consumption spending and business investment will be tilted to downside when the GDP data are published. Retail sales for both October and November were soft despite the Australian Bureau of Statistics noting that the November result was artificially inflated by the Black Friday sales. The stage is set for a low growth rate for household consumption spending in the December quarter.

What’s more, residential building approvals are in free fall which will undermine growth as new construction declines.

The monthly international trade for October and November suggests net exports trimming about 0.2 percentage points from December quarter GDP, as solid export growth is being outpaced by a pick-up in import growth. To be sure, there is still a run of information and data on some of the monthly indicators plus the quarterly data on government spending, business inventories, investment and household spending on services are to be revealed. These will all feed into the final December quarter GDP result and they may yet prove to be positive.

Even if these indicators surprise on the upside, per capita GDP in the December quarter will grow by 0.2 or 0.3 per cent.

If there is any disappointment in the remaining data flow, per capita could fall 0.2 or 0.3 per cent, meaning consecutive quarters of negative growth.

What next for our economy?

The markets will be awaiting each data point between now and the next GDP data with huge interest. Either way, there are serious questions about the current stance of economic policy.The market has gone from pricing in interest rate hikes a month ago, to now be squarely pricing in interest rate cuts, such is the obvious concern with the economy.

At this stage, there has been no word from the government about the need for any stimulatory fiscal policy action, in part because of the proximity of the election, which is due to be held by May.

It may be up to the new government, which ever side wins in May, to dust off fiscal policy and look for a bit of stimulatory fiscal policy to ensure the weakness evident in the second half of 2018 does not become entrenched through 2019 and into 2020.

It should also fall to the RBA to cut interest rates sooner rather than later to help support the increasingly troubled economy.

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

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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.