Maxim Monthly Market Insights - December 2015

  • Merry Christmas. We end 2015 with the Australian economy doing what it has done for almost 25 years, defying the doomsayers. Growth is ending the year in much better shape than many predicted.
  • Strong employment growth has mitigated against low inflation to stay the RBA’s hand from easing and potentially turn the focus toward a discussion on tightening.
  • The prime minister’s Innovation Statement is an important part of driving the economy forward now and into the future.

 

Merry Christmas – Australia’s jobs market is rocking and rolling

Australia it's in the midst of a jobs boom not seen since before the GFC. Novembers jobs numbers showed a rise of 71,400, to follow on from October's rise of 56,100. That's the fastest rate of two-month growth since 1988.

But it doesn't stop there.

Over the last 12 months the Australian Bureau of Statistics had reported that total employment grew 342,000 (a rate of 3.0% year on year) in the 12 months to November. That’s a sharp acceleration from the rate of growth which was running at 2.0% yoy in September to 2.7% yoy in October. Put simply that’s taken the year on year jobs growth back to the highs when mining boom part one was under way and rates were up above 7%.

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Of course that may raise some talk of rate rises in 2016 if the job gains are not reversed. That’s because employment growth has accelerated to 3% per annum. The last time employment growth was running this fast rates were either 2.25% (2010) or 5.25% (2008) higher than the current RBA cash rate of 2%.

But, the good news, the type that builds consumer confidence and drives business through your doors is that not only is employment strong but unemployment is down again. it's that the associated fall in the unemployment rate to 5.8% had consolidated last month’s break of the uptrend in unemployment since the GFC.

That move lower in the unemployment rate, the break of trend, and the communication through the media that unemployment has continued to fall will make workers feel more secure. As a result, consumers will be more comfortable borrowing and spending in the economy. And, there will be more wage earners in the economy spending so the circulation of cash through the economy should increase also helping build growth momentum.

Again that's good for business and for the domestic economy.

Australia is in the midst of a difficult economic transition and headline inflation is running at just 1.5% per annum. But the Q3 national accounts release earlier this month did show a broadening of growth in the domestic economy, the Australian dollar is providing a lift and business conditions are strong. So maybe the jobs market strength is a sign that the transition is working better than we all appreciate.


The shape of 2016

2015 has been a volatile year.

Australia has had a change of prime minister, and treasurer. The Australian dollar crashed below 70 cents, the stock market disappointed everyone and is currently down more than 7% since the close at 5411 in December 2015. Iron ore, crude oil, copper and other commodities have crashed dragging out terms of trade lower with them. And the global economy, and global trade have slowed to the extent that economic output this year globally is going to be the weakest since 2009.

Yet all through this the Australian economy has continued to muddle through. Recent Q3 national accounts growth showed the economy printed a relatively healthy 2.5% growth rate in the year to the end of September. Add in the fact that employment remains strong and the nation has a solid base for 2016.

But what might the year ahead look like? Taking into account that Peter Drucker once said “trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window,” I’m going to have a stab anyway.

So here are 5 themes we’ll be talking about in 2016:

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1. How low can commodity prices go? – after years of relentless selling 2016 could be time for a turn around.
2. How high will US interest rates go? The Fed will be challenged by lowflation but they will increase rate 4 times in 2016. That’s a risk for stocks in Australia and globally. Will the ASX200 have another down year?
3. Will the RBA raise rates? No time soon but if employment remains strong and commodities bottom the 2% is too low.
4. When will Sydney house prices stop falling? The bubble has burst, clearance rates are falling and property prices are likely to drift lower as investors sit on the sidelines. But prices shouldn’t fall too far, more like 2003-2010.
5. Where will the Australian dollar head? It looks like another volatile year for the Aussie. A 65-77 cent range seems fair, or maybe 67-78.

And a Bonus theme

6. When is the election and will it be fought on the GST and an overhaul of theFederal government’s finances? Markets are much easier to guess at than this one.


Innovation Nation

It’s easy to be sceptical when politicians announce grand policy changes like prime minister Turnbull’s much vaunted Innovation Statement released in December. Turnbull launched the statement saying “Welcome to the ideas boom. Unlike the mining boom, it is a boom that can continue forever.” It sounds like the usual politico speak that we hear all the time. But the new policies which support innovation, changes bankruptcy laws allowing entrepreneurs to be prepared to fail and fail again, and the many other measures fit with the changed narrative in the economy since Turnbull ascended to the prime ministership. That’s important to help build confidence not just in the entrepreneurial IT class but across Australian business more broadly. If politicians are making long term plans rather than the short termism that’s grips the nation since 2009/10 then business owners will be more comfortable doing the same.
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Tying it all together: It is a great time to be an Australian. Not just because the prime minister says so but because the economic dynamism that propelled the economy toward its 25th year without a recession continues. Risks are ever present, but the economic transition is real and gaining traction.

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