Watch out Australia: There's a flood of dismal economic news on the horizon

Wed, 01 May 2019  |  

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/watch-out-australia-theres-a-flood-of-dismal-economic-news-on-the-horizon-211110783.html

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

Watch out Australia: There's a flood of dismal economic news on the horizon

The Australian economy is in trouble and Scott Morrison and the Liberal Party government need to come clean and acknowledge this and outline a framework how this period of economic funk is to be addressed if they win the 18 May election.

The Liberal Party is campaigning in the election on a “strong economy” and being “good economic managers”, bold claims that fly in the face of the latest score card for the economy.

That scorecard shows a flood of what is, frankly, disappointing or even dismal economic news. Australia is going through a very rare recession in per capita GDP terms and last week saw data showing zero inflation in the March quarter. Contribution to these indictors of economic funk is the fact that well over half a trillion dollars of householder wealth has been destroyed as house prices have tumbled.

Add to that the fact reported by the Australian Office of Financial management last week that gross government debt is $543 billion, almost double the level that the Coalition government inherited in September 2013, and the scorecard is looking very ratty indeed.

As the ad man used to say, “but wait, there’s more”.

For the last four years, wages growth has been weak and at one stage fell to the lowest level on record. Then there are falling job advertisements, business investment as a share of GDP is at a 25 year low and over 13 per cent of the workforce is either unemployed or underemployed. It is a scorecard for the economy that under Morrison’s watch must be rated an “F” for fail.

Of course, it must be noted, the Australian economy experiences cycles, up and down.

But Australian economic history shows that in every other period of weakness, the slump has been driven by a mix of weaker global economic conditions and / or a severe downturn in commodity prices for the bulk of commodities we export. When we check how these forces have fared in the last year, they show global growth strong and commodity prices booming. This goes to show, quite plainly, that this is home-grown economic malaise.

Indeed, without the extremely positive influences from overseas, Australia’s current per capita recession would be something even more problematic, that is, growth and inflation would be even lower and the labour market weaker. One way these problems are almost certainly going to be dealt with is interest rates.

Such is the fragile nature of the economy that financial markets are pricing in the Reserve Bank of Australia needing to slice official interest to less than 1 per cent, yes, under 1 per cent, in an effort to arrest this increasingly poor economic performance. Further than this, there are some well respected economists starting to actively consider Australia needing negative interest rates and money printing to overcome the disinflationary problems confronting consumers and business, especially if the house price fall continues and crunches into an already soft economic underbelly.

While negative interest rates and quantitative easing remain highly unlikely, it was the policy response implemented by many countries during the depths of the global financial crisis when those economies were struggling to cope with deep recessions.

There is also discussion about the new government, after the 18 May election, needing to rollout fiscal policy stimulus, mainly in the form of additional government spending in an effort to underpin growth. This may be needed if things get worse. Either way, almost all economists are increasingly concerned about the lack of strength in the economy and just how far away it is from achieving above trend growth, full employment, a lift in wages growth and a return to a healthy rate of inflation between 2 and 3 per cent.

The economy is not strong, the labour market is still weak and inflation is well away from the target and falling.

Morrison needs to acknowledge that and to say what he will do about it if he wins the election.

comments powered by Disqus

THE LATEST FROM THE KOUK

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

Thu, 20 Jun 2019

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/its-time-end-strong-economy-propaganda-230414837.html 

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

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 

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

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.