Maxim Monthly Market Insights - March 2018

• The Australian economy has entered 2018 in a healthy state with business confidence and conditions strong and with the employment market having created more than 400,000 jobs in 2017.

• Likewise the global growth backdrop remains robust with US growth further stimulated by Trump tax cuts and infrastructure spending while all nations in the OECD growing in a synchronized fashion for the first time in a decade. The IMF says global growth will print 3.9% for 2018 and 2019

• But against this positive backdrop the usual caveats on domestic growth remain with high household debt levels, low wages growth, and a housing market restricted by regulatory measures to rein in excess speculation.   

RBA - still worried about low wages and its impact on consumption

The RBA has on at least 6 occasions during the month of February set out its outlook for the economy over the course of 2018. That outlook has been a positive one. But it has also one that remains tempered by real concerns that the lack of wages growth across the community at a time of high debt levels


Indeed, while the RBA is simultaneously saying the economy will be growing around – or a little above – potential in the 3-3.5% region it is also only forecasting modest falls in unemployment, and still very low inflation.

The good news on that front is that the RBA believes it won’t need to raise interest rates anytime soon. But the bad news is that the RBA believes part of the reason it won’t have to raise rates is because wages growth remains slow (2.1% according to the latest wage price index released in Febraury) and that low wages may be exerting pressure on households budgets and spending.

Earlier this month, Luci Allis – RBA assistant governor (economic) made this point in a speech titled “Three Questions About The Outlook”.  

Ellis said, “The living cost pressures that many households feel have therefore been an income story…Weak income growth can run below consumption growth for a time, but not forever. If households start to see this weakness in income growth as permanent, they are likely to change their spending patterns in response. We might be seeing this in the details of the consumption figures: growth in spending on discretionary items, like travel and eating out, has slowed while growth in spending on essentials has held up”. 


Wages growth is finally starting to edge off record lows. But if your business is in a consumer facing sector than generating sales and revenue increases much above the nominal level of economic growth – 4.5 to 5.5% - in coming years will be very hard.

Global Growth looks very solid

12 months ago there were concerns about China’s growth. The EU project looked under an existential threat from Marine Le Pen and the French far right as France headed toward a crucial Presidential election. Japan’s economy looked moribund and the US was stuck in what many thought was the new normal of low growth and low inflation.

Fast forward 12 months and these issues are behind us having all been resolved in the positive. 2017 ended with a resynchronisation of growth.
2018 now looks like the first full year of synchronised global growth in a decade.

But this isn’t just any growth. It’s not credit induced. This growth is being underpinned by fundamentals with the global expansion driven by China, Europe, Japan and the US.

The global tide is lifting. That provides a positive backdrop for the Australian economy and Australian businesses.

House Prices falls and the Hunter

Be careful what you wish for.

That’s something I’m sure I’ve written over the past couple of years in this space as a warning to APRA and the RBA that their macro-prudential rules and clampdown on investor and more latterly interest only loans runs the risk of being too successful.

Of course it is important to note that neither APRA or the RBA would be disappointed with the fact that all 5 major capital city house prices are in negative territory for 2018 so far.

That’s because these two banking regulators are more concerned with economic and financial stability for the Australian economy as a whole. Not the pocket books of a cabal of developers, investors, and speculators in Australia’s two biggest cities.

Likely APRA and the RBA are also high fiving themselves at the prospect of investor loans and investors being replaced by first home owners – that’s the green line being replaced by the red line in the chart.

Indeed, there is a real chance that the RBA may even want house prices to fall further given RBA governor Lowe’s comment in February when appearing before a Parliamentary Committee  on economics that, “it would be a good outcome if we now experienced a run of years in which the rate of growth of housing costs and debt did not outstrip growth in income, as they have in recent years”.


Now it’s fair to say the governor is not overly concerned about debt levels per se telling law makers that “absent some major shock, I don’t have a particular worry about it”. And that’s something another of his assistant governors, Michelle Bullock, also reiterated in a speech during the month.

But, for the economy as a whole the point Ellis made about low wages restraining consumption growth may be magnified if house prices continue to fall in the big cities.

For us here in Newcastle, the Valley, and the Hunter coast though while the chill winds of a Sydney slowdown are bound to find their way into the local market initially there may be a case to be made that Sydney’s weakness could be our strength.

You would have read the stories in the SMH in late February (here, and here) about the net flow of migration out of Sydney interstate and to regional New South Wales. For the past year or so I’ve been talking about the Newcastle diaspora wanting to come home when their house price rises have maxed out in the windy city. They may not want to dilly dally because I can make a strong case that behaviourally these articles come at the exact moment broader Sydney will be assessing its options for the next move. And who wouldn’t want to live in the Hunter?

Written by Maxim's "Economic Expert", Greg McKenna


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