Maxim Monthly Market Insights - Greg McKenna

  • The Australian economy might finally be responding to historically low rates with signs that low rates and the wealth impact of higher property and stock prices may be gaining traction.
  • Perhaps that’s why the RBA left rates on hold again in April, but retained an easing bias.
  • China is still front and centre again this month as signs of a slowing economy defy attempts at stimulus

Can ‘below trend’ growth be good growth?

Data released recently suggests that the Australian economy, or at least the domestic part which includes consumers, is starting to respond to the three pronged positives of lower rates, higher stocks and superannuation balances, and higher property prices. This, according to some economists has raised hopes that despite the end of the mining boom, the Australian economy can avoid the sharp slowdown many still fear.
greg-mckenna-0003.jpgThat’s certainly the message from the February retail sales data which unexpectedly leapt 0.7% - almost double the market estimate.
It’s also the message as Australia’s massive services sector managed to stay in the expansion zone. The Australian Industry Group’s performance of services index (PSI) for March showed that while the PSI dipped back 1.5 points, the print of 50.2 kept it on the right side of the 50 expansion/contraction level.
That’s not super strong obviously. But, what’s important here for businesses all over the country and in the Hunter is that the economy is growing – its just not growing as much as many would hope - what the RBA calls ‘trend-growth’.
greg-mckenna-0002.jpgThe question now is whether this pickup in domestic demand can be sustained or whether it’s simply a sugar hit from the big fall in petrol prices which briefly saw some service stations selling below $1.00 a litre in January.
Back at $1.30 a litre now that is certainly a risk. Equally the enduring concern that respondents to multiple surveys have around employment is a huge hurdle to unbridled consumption.
But old style pre-GFC rates of borrowing for consumption is not what Australia needs – Australians are carrying enough debt as it is. Rather Australian’s need to be comfortable enough that the economy is in safe hands, on solid ground, and with a positive outlook, that they will then spend an increasing part of their income and growing wealth.
Another good sign for economic growth is the recovery in the construction sector. New orders according to the AiGroup leapt 12.8% last month. This is exactly what and where the RBA wants monetary policy to work through the economy.
So it’s a sign that monetary policy is doing its job as the RBA hoped.
It’s now over to the budget and consumer confidence. If we can get a positive outcome for both of these then the second half of 2015 might surprise given the wealth effect of stocks, super and housing.

The Federal Budget holds the key

As discussed above there is growing evidence that the Australian economy is starting to heal, that monetary policy is starting to gain traction, and that if confidence can recover to something even ‘normal” or “average” by hisotical standards Australians will start spending again.


RBA on Hold but a May cut “CERTAIN”

TD Securities Head of Asia Pacific Research Annette Beacher is certain the RBA is going to cut in May after the ‘shock’ decision to leave rates at 2.25% this week.
Beacher doesn’t hold that view simply because she thought they were going to cut in either April or May. Rather, she says the Governor’s framing of the fall in commodity prices sets the scene for another cut.
The key for Beacher is that falling terms of trade “translates into negative national incomes” as Australia witnessed last year. “We could see a repeat later this year,” Beacher said. That means that “Short of iron ore falling to $US30/t, we see the terms of trade falling up to 10% this year, despite the hefty -7.5% fall last year.”


The RBA is still likely to cut – one more time



But confidence is at 8 month lows and earlier this month ANZ Chief economist Warren Hogan hit on the conundrum that we are increasingly seeing in the domestic economy noting that the “strength in retail sales over January-February is surprising in light of continuing lacklustre consumer confidence.” That’s something he says that might have its basis in ongoing fear of job losses.
“A key question for the outlook therefore is the extent to which a soft labour market will offset the ‘feel good’ factor from higher asset prices. In our view, these conflicting forces suggest the road for confidence and retail over the next year may be bumpy,” Hogan says.
If the Government can deliver a no shock Budget perhaps we’ll break the negative cycle.

Chinese growth is REALLY slowing now

You can’t ignore China at the moment.
Whether it’s Shanghai and Hong Kong stock exchanges going through the roof – Shanghai up 100% in 12 months, Hong Kong is now the biggest index in the world. Maybe it’s the iron ore war which has so far claimed plenty of mines and now recently seen Atlas Iron request a suspension from the ASX to regroup and restructure its business.
But, the key thing about China is that the economy is slowing. Potentially slowing much more than many expect. That’s the feeling that you get watching the slowdown in the rate of money growth and the circulation of money in the economy.
Bloomberg Metals analyst Kenneth Hoffman reckons the Chinese economy is “a lot worse than you think.” Hoffman said “China’s metals demand is plummeting … Demand is rapidly deteriorating as the government slows its infrastructure building and transforms into a consumer economy.”
China is not going to go backwards in a growth sense anytime soon but a growth rate in the 5% region instead of 7% will feel like a recession for the global economy.

Tying it all together: Employment growth is strong but, lagging population growth. This with confidence is holding the economy back. But signs emerging that even with a slowing China domestic growth is starting to pick up after boosts from a lower Aussie dollar, rate cuts and the wealth effect.


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