Maxim Monthly Market Insights


  • Australia’s economy is slowing and the RBA is cutting rates to shore up growth. But it’s the government that needs to step into the breach.
  • The downgrade to Chinese growth and the rebalancing are headwinds for Australian growth in the years ahead, but the lower Aussie dollar is helping the economy transition.
  • The surge in Sydney housing is a big hurdle to lower rates. But the RBA will cut again and the wealth effect will help consumer confidence and spending.


Australian GDP Growth slowing. But, it’s not all bad news

slide1.pngAnyone who has attended a Maxim breakfast over the past 12 months or more knows that I have continued to have a glass half full view of the economy and urged businesses to do the same.

But I also talked about the fact that the RBA would need to ease last year, even though at the time no one, not even Westpac’s Bill Evans, was saying they would be cutting rates.

That’s important context because the recent GDP data shows that the lower Aussie dollar, lower petrol prices, low mortgage rates and recent RBA rate cuts are working through the economy to buoy domestic consumption.

But while consumers are saving less and spending more, business is still hunkered down and unsure what the future will bring. Indeed it is worth noting that the 9% household savings rate is the lowest it’s been since the GFC kicked off in September 2008 with the collapse of Lehman Brothers.

slide3.pngThe key here is confidence.

While business conditions are around long run average levels and business conditions are not too far below, business surveys continue to report
some level of disquiet.

This is particularly the case at the top end of town with the NAB’s ASX 300 business survey showing confidence fell 13 points to -3 in Q4 2014. But business conditions for Australia’s SME sector fell for the first time in a year during the December quarter as well.

That’s important because the small business sector, which accounts for three - quarters of employment in the domestic economy, has “soft hiring intentions”.

Which is why RBA Deputy Governor Phil Lowe recently tipped a bucket on both sides of politics telling them to lift their game.  “At the end of the day, the solution to the problems caused by the disconnect between the desire to save and the desire to invest cannot lie with monetary policy.  Instead, it lies in measures to improve the investment environment so that once again there is strong productive demand for the use of our societies’ savings,” Lowe said.  Canberra – it’s over to you.

Confidence is the Key to the outlook.

Here’s some advice from a man who once steered the US Economy as Treasury Secretary under Bill Clinton which just might help frame this year’s Budget.

In an interview with McKinsey Insights, Summers said:

Confidence is the cheapest form of stimulus. Governments need to recognize that fairness and inequality and sharing the benefits of growth more widely are crucial issues going forward, but they need to do it without invoking a politics of envy.

That can be very debilitating to business investment.

The Australian government and Joe Hockey’s first budget failed this test in May last year.

The release of the intergenerational report this week suggests they are not about to back down on the tough budget.

More rate cuts are coming.

At its meeting this month the RBA decided to leave rates at the modern day low of 2.25%.

That disappointed a large swathe of the economic commentariat but that disappointment is more about ego and less about the reality of the RBA’s normal operating procedures.

What’s important for business and your clients is that the RBA has a clear and explicit easing bias. The RBA said:

“The Board judged that, having eased monetary policy at the  previous meeting, it was appropriate to hold interest rates steady for the time being. Further easing of policy may be appropriate over the period ahead, in order to foster sustainable growth in demand and inflation consistent with the target.”

More rate cuts are on the way!

Reform of the governments finance over the long term is a must to keep Australia the prosperous and egalitarian nation that it is. But the near death experience of the Prime Minister, and by extension the Treasurer, seems to have at least tempered their aggression.

Chinese growth is slowing

slide2.pngChina remains Australia’s number one trading partner. Iron ore shipped through Port Hedland continues to hit new records. But the Chinese government is reforming its economy, fighting corruption and trying to increase domestic growth and reduce reliance on investment and exports.

That means that the growth rate of 2.4% for 2014 was the slowest rate of growth since 1990. It also means that this month The National People’s Congress – the annual Communist Party gathering – has downgraded the Chinese growth to “approximately 7%” with Chinese Premier Li Keqiang
that “the downward pressure on China’s economy is intensifying.”

He added that

Deep-seated problems in the country’s economic development are becoming more obvious. The difficulties we are facing this year could be bigger than last year. The new year is a crucial year for deepening all-round reforms.

On the face of it that suggests that China will drag on Australian growth. But, while the absolute rate of growth in China will slow the size of the economy now, compared with 3, 5 or 10 years ago,
means growth rates in the 6-7% region for China will still support
the Australianeconomy.

Tying it all together:

Australia is slowing and unemployment is rising. But the RBA is cutting rates, the Aussie dollar is falling and the Government knows it erred with last year’s budget. Economic growth will feel weak this year but consumers are starting to spend again.


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