Is the Aussie economy slowdown good or bad news for you?

Mon, 04 Mar 2019  |  

This article first appeared on the Yahoo Finance web site at this link: https://au.finance.yahoo.com/news/aussie-economy-slowdown-good-bad-news-015353581.html 

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Is the Aussie economy slowdown good or bad news for you?

Your economic well-being is undergoing some significant changes at the moment. Whether that is good or bad news depends on your home ownership status and intentions to buy, and the amount of money you have in invested in shares either directly or indirectly in your superannuation fund.

To the stock market first

Having been beaten down late last year, the Australian stock market has staged a powerful pick up. Compared with the low point in December, the ASX200 has risen over 12 per cent in two months. This is, quite clearly, great news for your superannuation balance and for your wealth if you own any shares directly.

The change in sentiment about interest rates and a solid profit reporting season has underpinned this jump in share prices and with US and local interest rates set to remain low or be lowered in the months ahead, share prices should continue to do well.

Falling house prices met with dismay and joy

From the perspective of personal finances, the news on falling house prices has been greeted with both dismay and joy. Home owners in Sydney Melbourne, Perth and Darwin and reeling under the weight of wealth destruction with prices down by between 10 and 25 per cent.

In Sydney, for example, that house that was valued at $1 million back in the middle of 2017 is now worth around $870,000, a drop of $130,000 in less than two years.

Ouch!

And residential real estate owners?

Clearly, this is bad news for anyone who owns residential real estate. For those previously frozen out of the housing market in recent years because of difficulties saving a decent deposit to crack into the market, the news is good. There is evidence that first home buyers are starting to line to tap into the market as affordability improves.

Over the past few years, the mix of falling house prices, increases in incomes and interest rates remaining at record lows, there is a rare, perhaps a once in a generation, opportunity to enter the housing market with affordability so favourable. It is hard to know when the current cycle of house price falls will end or indeed, what sort of falls are still in store before the bottom is reached. This probably means the pain of existing home owners and the joy of pending home buyers will remain for a while longer.

Even first home buyers should be careful what they wish for

There remains a real risk that the house price falls could hurt even those looking to get into the housing market. That risk is if the price declines intensify to a point that impact negatively on consumer spending, bank profitability and force the economy into recession.
One only has to look at many countries a decade ago to see how house price declines can spark a very deep and nasty recession with a jump in unemployment.

For Australia, the risks of such a hard landing look remote.

The oversupply of dwellings is about to moderate. The sharp falls in new building approvals could see the supply and demand dynamics about square later this year with a real possibility of a housing shortage in 2020 or 2021. Recall the strong increases in population, which adds to housing demand, continue unabated.

In summary

These trends in stocks and house prices go to confirm one of the basic tenets of economics – there are cycles up as well as down. These cycles will no doubt continue, it is just the timing and orders of magnitude that economists and market strategists argue about.
For stocks, they appear to be in a sweet spot and the upswing still appears to have some way to run.

For housing, the down trend is also set to continue for a while longer, even though the fundamentals point to a bottom of the cycle within the next 6 to 12 months. If you are looking to buy, keep this in mind and maybe just take advantage of the lower prices available today rather than tyring too hard to pick the bottom.

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“Bitterly disappointing”: We are seeing a once in a generation policy failure

Imagine having the power to promote economic growth, lower the unemployment rate and set in train the conditions to boost real wages growth and inflation?

It would be immensely satisfying to change policies to improve the living standards and quality of life for every day, hard-working Australians and their families.

Wouldn’t it?

Next imagine a harsh reality where economic growth is weak and slowing, the unemployment rate is rising and wages growth and inflation well below a satisfactory level, and you choose not to wield the power reverse these uncomfortable circumstances?

Doing nothing, unwilling to pump some much needed cash into the economy because of a political dogma wedded to a notion that budget surpluses are good and that holding interest rates unnecessarily high so you might dampen demand for houses – which is seen as a problem - and household debt overwhelms your power to make things better.

The RBA admits it stuffed things up – sort of

Mon, 22 Jul 2019

This article first appeared on the Yahoo website at this link: https://au.finance.yahoo.com/news/did-the-rb-as-monetary-policy-put-our-economy-at-risk-033940907.html

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The RBA admits it stuffed things up – sort of

The Reserve Bank of Australia needs to be congratulated for publishing research which implicitly confirms that it made a mistake when setting monetary policy in the period mid-2017 to early 2019.

Not that the research explicitly says that, but the RBA Discussion Paper, Cost-benefit Analysis of Leaning Against the Wind, written by Trent Saunders and Peter Tulip, makes the powerful conclusion that by keeping monetary policy tighter in order to “lean against” the risk of a financial crisis, there was a cost to the economy that is three to eight times larger than the benefit of minimising the risk of such a crisis eventuating.

The costs to the economy includes lower GDP growth and higher unemployment, that lasts for at least for several years.

A few terms first.

According to the Saunders/Tulip research, “leaning against the wind”, a term widely used in central banking, is “the policy of setting interest rates higher than a narrow interpretation of a central bank’s macroeconomic objectives would warrant due to concerns about financial instability”. In the RBA’s case, the “narrow interpretation” of the RBA’s objectives are the 2 to 3 per cent inflation target and full employment.

In the context of the period since 2017 and despite the RBA consistently undershooting its inflation target and with labour underutilisation significantly above the level consistent with full employment, the RBA steadfastly refused to ease monetary policy (cut official interest rates) because it considered higher interest rate settings were appropriate to “lean against” house price growth and elevated levels of household debt.