Maxim Monthly Market Insights - August 2015


  • The RBA has downgraded Australia’s ‘potential’ growth rate. But, that means rates won’t be cut – we’ll explain why.
  • Employment growth and retail remain strong. That’s good news for businesses, and the outlook for the economy
  • Australia’s prudential regulator, APRA, looks like it is engineering an end to the property price bubble in Sydney. But, it could be the case of ‘be careful what you wish for’.


Sometimes downgrading growth doesn’t mean rate cuts – Here’s why

The RBA delivered an upbeat assessment of the economy in its Quarterly Statement on Monetary Policy earlier this month. It’s expecting growth of 2.5-3.5 by the end of next year and 3-4.5% in 2017. Crucially it thinks unemployment won’t get worse. But, the RBA also downgraded Australia’s potential growth rate. Not because the bank thinks the economy is going to fall in a hole and not because they think that Australia’s trading partners are going to fall in a hole either.

august_2015_-_maxim_monthly_market_insights.jpgRather, the RBA said it is Australia’s rate of population growth that is the culprit.

A few years back RBA governor Glenn Stevens gave a speech highlighting the need for productivity growth because as population growth slowed it would inevitably cause overall economic growth to slow.

It is a theme he returned to recently in his Anika foundation speech when he firmly hit the brakes on Australia’s potential economic growth rate.
The RBA acknowledged that Australia’s population growth had been high “both by the standards of recent decades and in comparison with other advanced economies.” But that is changing with “estimated resident population grew by 1.4 per cent over 2014, down from the recent peak in growth of 1.8 per cent over 2012 and average annual growth of 1.7 per cent since 2006.”

That’s important the RBA said because:

Lower population growth has important implications for the economy. It lowers the growth in demand for goods and services, as well as the economy’s capacity to supply those goods and services. On the demand side, lower population growth would, all else being equal, be associated with less growth in consumption. Over time, it may also reduce the need to expand the capital stock through investment in residential housing, non-residential buildings, machinery & equipment and so forth. At the same time, lower population growth implies that there are fewer individuals available to be employed in producing goods and providing services.

The implications for business are obvious. In terms of interest rates this statement means that if population growth is going to be lower in the future then there is less spare capacity forlower RBA interest rates to stimulate. That means further rate cuts are less likely given current conditions. The flip side is it also implies overheating, and the need to increase interest rates is a lower hurdle than previously thought.


Australian employment remains STRONG

august_2015_-_maxim_monthly_market_insights_2.jpgAustralia’s employment market is one of the bigger conundrums of the Australian economy.  How exactly can you have the highest unemployment rate in more than a decade but still characterize the market as strong.

It’s a question being asked in many quarters of the economy. But hopefully one which regular readers of this monthly note and attendee’s at Maxim Breaskfasts over the past few years will understand better than most.

The answer is that as at the end of July the Australian Bureau of Statistics says that there were 11,810,706 people working in Australia. A new all-time record number of Australians in work.

As I often highlight, that’s important because more Australians working means more spending. We live in a largely service-based economy so that money then flows around creating more spending and it seems, more jobs.

august_2015_-_maxim_monthly_market_insights_3.jpgThe last time unemployment was sitting at 6.35% was 2002. Something that the media focused on early this month and opposition spokesman pounced on. But back in 2002 there were only around 9.165 million people employed in Australia. An additional 2.65 million are working now.

There was also lower labour force participation in 2002 than we have today. That is, a lower percentage of Australians said they were either working or looking for work. Yes, the unemployment rate is the same as in 2002, but the higher participation rate today tells us that we’re in much better shape than 13 years ago.

Equally the employment-to-population ratio is higher now than in 2002. That tells us a higher percentage of Australians are earning an income via jobs. It’s off the recent highs, but it is rising again.

Many observers won’t believe the economyn created 38,500 jobs last month. I’m one of them, and the ABS notes there is a wide margin of error for any single month’s data. But, the key here is that the strength in employment says the economy continues to be in much better shape than many admit.



The end of the bubble – CAREFUL!

The actions of Australia’s major home loan lenders recently to increase interest rates on investor loans, require apartment developers to have more skin in the game and investors a bigger deposit are all responses to APRA’s clampdown on lending practices. But, they are also a reflection that Australian banks’ own assessments of the risk in the housing market is such that any loss of business at this point in the cycle is a necessary part of protecting themselves from future losses as the cycle turns down. That’s important because the wealth impact of rising property prices has helped NSW to it preeminent position as the key driver of jobs and economic growth in the economy at the moment. It’s helped growth elsewhere too. But as the marginal player (investors) exit the market the risk is that prices fall faster than anticipated.

Not predicting a burst. But can you actually let air out of a bubble.



Tying it all together: The RBA has signalled that rates in Australia are on hold for some time. That’s a positive because it implies the economy doing reasonably well and employment strong. That’s good for business. But the fall out of the end to the housing boom needs to be watched closely.


Prepared by Greg McKenna on behalf of Maxim Accounting

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