Maxim Monthly Market Insights - March 2016

• The Australian and Hunter economies are weathering the end of the mining boom and showing signs of renewed strength. 

• That’s seen a large number of jobs created, unemployment fall and overall consumption fill the void left by collapsing mining investment. 

• It means Australia has now stretched its run without a recession to a near record 24.5 years. That might disappoint the doomsayers but it highlights again the remarkable resilience of the Australian economy.


The Australian economy defies the doomsayers with strong growth


For some years now when I have stood in front of maxim clients at the many breakfasts we’ve attended, and in my writings here, I have continued to stress the “glass half full” nature of the Australian economy. That has never been to decry the real issues facing some sectors of the economy, especially those reeling from the end of the mining boom. But it simply reflected the changing nature and structure of the economy as monetary policy and a weaker dollar combined to rebuild the construction, tourism, educational and other services sectors of the economy.

My point was that while the economy was far from strong, businesses who had been able to weather the tough times of the GFC should be able to continue to survive, and in many cases prosper as the domestic economy strengthened.

 

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That is exactly what the most recent Australian economic growth numbers showed. With a print of 0.6% growth in the fourth quarter of 2015 GDP was much stronger than expected. That took the growth rate for the 12 months to an astonishing 3% with growth in the fourth quarter driven largely by household consumption which contributed 0.4% of the 0.6% growth rate.

Key to the positivity though, besides the strength in the domestic economy, is that the nominal growth rate in the economy is back at its long run average for the non-mining economy. So while mining is still a drag on overall economic growth, and some businesses and sectors in our region will feel pressured, the overall consumption and services based economy – the biggest part of the Australian economy – is doing much better than many give it credit for.

How else could Australia have created more than 300,000 jobs in 2015 when all the leading indicators were for much weaker job creation. Of course many decry the reality that a chunk of those jobs are in lower paid positions in the health and aged care sector. But the point is that more Australians than ever before are working and that means more people are earning an income and spending that income within the Hunter and Australian economy more broadly. Locally we have a way to go to get back to peak employment. But unemployment in the region has fallen from 9% in January 2015 to 6.9% at the start of this year.  

Like Australia the Hunter is doing better again.


What a difference a month makes.


2016 is an intriguing year. Markets moved sharply from rout to recovery as fear gave way to hope – or to put it another way acute pessimism snapped back because markets and traders didn’t price in a slowdown in China or the global economy they had moved to price in armageddon.

That recognition saw markets change tone sharply as February moved toward March. Now, with just a few days before the all important US Federal Reserve meeting stocks are back near the level of late Decemebr and the Australian dollar is up near 76 cents.

It’s a stunning reversal of fortune.

Iron ore and Crude up around 40% from the lows, copper is up 17% and concerns about China’s economy remain but aren’t the focal point they were just 4 or 5 weeks back.

But what has actually happened? Has the global economic outlook turned more positive? Far from it actually, as the IMF pointed out in early March with a stunning speech from David Lipton, first deputy managing director of the IMF. Lipton gave a pretty sobering assessment of the global economic outlook.

“The IMF’s latest reading of the global economy shows once again a weakening baseline,” he said. “Moreover, risks have increased further, with volatile financial markets and low commodity prices creating fresh concerns about the health of the global economy.”

The key here is that Two things are troubling Lipton:

“First, because protracted low global demand, and adverse feedback loops between the real economy and markets may generate additional deflationary pressures, putting us at risk of secular stagnation. Second, and equally relevant, is that labor supply and labor productivity growth have fallen considerably over the past decade, further aggravating these adverse dynamics.”

This means “the downside risks are clearly much more pronounced than before, and the case for more forceful and concerted policy action, has become more compelling,” Lipton said.

Why am I raising this when I have discussed the continued strength of the Australian economy in a positive light? The reason is that the global outlook is acutely important to markets and the overall economic environment in which Australian businesses must operate.

But the key is that governmental austerity and a lack of fiscal spending around the world is the missing link between monetary policy and a real and sustainable global economy. “With negative policy rates taking hold in some countries, the scope for monetary policy to boost domestic demand further is limited, so its remaining potency may lie mainly in weakening currencies and attracting demand from the rest of the world in a way we should avoid,” Lipton said. Thankfully in Australia the RBA still has plenty of ammunition with a 2% cash rate.


Consumers in a volatile world


Thankfully the underlying Australian economy is not as volatile as financial markets. It’s 24 and a half years since Australia had a recession. A large part of that is because the RBA has done a stellar job, another is that the Aussie dollar’s fall acts as a shock absorber stabilising economic growth. The continued upward appreciation of house prices has also helped via the wealth effect on households and consumption.

But consumers don’t exist in a vacuum. So having used savings – the household savings rate fell to a post-GFC low of 7.6% in the December quarter - to fund a strong quarter of spending consumers may be more circumspect in the months ahead. 

That’s particularly the case if property prices slow their recent ascent. But with new car sales at record highs – consumer’s actions suggest they are still in good shape financially.

 

Tying it all together: Australian growth continues to defy expectations as the economic transition continues. The growth in services and consumption is an important insulator for the overall economy as mining remains a continued drag. But growth will remain fragile and subdued because of the global growth backdrop.

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