Maxim Monthly Market Insights - July 2016

• The Australian dollar is rallying but the overall tailwind it has given the economy continues to support growth.
• That tailwind is assisting Australian businesses report conditions which are sitting up at their post GFC peaks thus aiding the economic transition away from the mining investment boom.
• The focus is now on consumer price inflation and whether or not the RBA needs to cut one more time.

The Australian economy still looks good

We’ve consistently taken a glass half full approach to the economic outlook over recent years. It was problematic for a while with forecasts for economic or housing doom getting all the headlines and “pollyanna’s” (as I’ve been called) like me receiving plenty of feedback that we had no idea what was really going on in the economy.

 

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But if I’ve learnt anything in my 30 years of banking, finance, and markets, it is that the Australian economy is a flexible beast made up of an amalgam of many different sub markets and economies which somehow – more often than not – find a way to balance each other out.

One of the primary reasons this has been possible is because of the floating Australian dollar which moves up and down as the economy needs and traders desire. Just this century alone the Aussie, against the US dollar, has traded through a range of 0.4775 and 1.1080. That’s important because in trading through that range, the Aussie dollar adjusts demand in the economy by sending pricing signals to domestic and offshore businesses and consumers. In doing so it gently, and sometimes not so gently, nudges changes in behaviour which drives investment and consumption into, and out of, the Australian economy. 

A high Aussie dollar encourages Australians to shop on Amazon US, travel overseas, and makes imports cheaper for businesses and consumers. A high Aussie dollar also encourages offshore travellers and students to think about other potential destinations. The flip side of course is that when the Aussie dollar falls, as it has over recent years, those same nudges lead to a significant uptick in domestic activity.

It’s why earlier this month RBA governor Glenn Stevens said in his statement after the monthly RBA Board meeting that “low interest rates have been supporting domestic demand and the lower exchange rate since 2013 is helping the traded sector.” That is, even with the Aussie higher than many hoped it would be at the moment, the flow on effects from the fall from 93 cents a few years back are still being felt through the economy.

Australian Business Conditions remain Solid

NAB Business Survey has been going since 1989 as a quarterly survey and from 1997 in its monthly form. It is the longest running business survey in Australia and in this time there has been no change to its methodology.   Over the years, studies show the NAB survey has been the most reliable and timely guide to many aspects of the Australian economy.

Those of you who are regular readers of this note and have seen me at the Maxim breakfasts will know that I always say if I could only see one piece of economic data a month for Australia it would be this survey.  It is no understatement to say that this survey is one of the primary reasons I’ve been such a Pollyanna when it comes to the Australian economy. 

 

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The latest release of the NAB’s business survey showed again the economic transition underway. NAB chief economist Alan Oster said “firms continued to report very high business conditions, pointing to another strong quarter for the non-mining economy”. He added “business conditions index rose from an already elevated level, hitting +12 index points in June, which is consistent with the post-GFC highs for the series”.

Of course the fact confidence still lags conditions is testament to the persistence of headwinds facing the economy. But strong trading and profitability are winning through and the employment index at +4 is as strong as I’ve seen it in some time. That manifested in an employment report for June which was much stronger than the headline rise of 7,900 suggested. Overall Australian businesses is doing better than it, and many expected. There is no reason to think that will change anytime soon. NAB’s Oster added “these results generally tell us we can be confident about the near-term outlook.

Inflation bounced back – RBA cut?

Australia has joined the global low inflation club. That reflects a relative weak growth rate in aggregate demand and global deflationary forces. Add in the choice architecture the internet offers and there is little pricing power for most businesses.

But the collapse in Oil has been a key driver of subdued inflation in 2016. But it has bounced substantially as have fuel prices at the petrol pump. So it’s important that that the latest update of the Melbourne Institute monthly inflation gauge jumped 0.6% on the back of fuel price rises.

No wonder inflation expectations have also bounced back. Now for the official figures on July 27.

The big question is will they be weak enough to prompt an RBA easing? My guess is the RBA will find it hard to cut rates in August.

Tying it all together: With Brexit and the federal election behind us, and with stock markets rallying globally, the 12-month pall that has been hanging over the global economy may be lifting. That could provide a positive boost to an already positive continuation of Australia’s economic transition. But 2016 has been nothing if not volatile so it will take some time for the fog to lift and the risk of the re-emergence of doubt is high. But Australia muddles on.

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