Maxim Monthly Market Insights - November 2015

  • Employment continues to defy the pundits views of a weaker Australian economy and the Hunter is finally benefitting as well. That’s good news.
  • But even with strong employment the RBA has left the door ajar to further rate cuts because headline inflation is so low in Australia
  • Global trade, China and emerging markets are still a clear and present danger.


Australia’s strong employment market will keep the economy moving

The Australian economy has been looking like it hit a flat spot recently. Headline inflation of just 1.5% is well below the bottom of the RBA’s 2-3% inflation target band and suggest a lack of pricing power in the economy for businesses which need to pass on the impact of the Australian dollar’s more than 20% fall in the past 12-15 months. That lack of pricing power lead many, myself included, to start to wonder whether the state of the national economy was weaker than had been previously thought.

Indeed many forecasters, including investment banks Goldman Sachs, UBS, major Bank ANZ and big Investors like AMP to call for an RBA rate cut. The reserve Bank itself was concerned enough about the lack of inflation in the economy to leave the door ajar for a rate cut (more on that later).

But all that changed with the release of Australia’s October jobs report. The report showed that employment grew an incredible 58,600 (seasonally adjusted) in October with 40,000 of those jobs coming in the full time category. That’s taken the total number of employed people in Australia to a new all-time high of 11,838,200.


At the same time the surge in employment saw the unemployment rate drop 0.3% to 5.9%. That means that the uptrend in employment that started just as the GFC kicked off in 2008 has now tentatively broken. I say tentatively because these data are volatile and prone to revision. So there is every chance that next month we find out that there wasn’t actually 58,600 jobs created this month nor that the unemployment rate was actually 5.9%.

But the key here is that the Australian labour market continues to be much stronger than many believe. Now as I alluded to the data is prone to revision and hardly anyone believes the economy actually created 58,600 jobs in October. But even with that said Goldman Sachs, UBS, and AMP all changed their call for an RBA rate cut after the data while the ANZ is walking away from the call.

Tim Toohey at Goldman said “We now believe that the most likely scenario is that the RBA keeps rates unchanged at 2.00% through 2015 and into 2017.” That period without a rate move is probably unlikely. But you get the picture.

The good news for the Hunters is as national employment has improved so has our region with the rate of unemployment back down near 7%. Just like the national outlook, more people working means more people spending. That means better economic growth for the region. That’s good news.


The RBA has an easing bias

Employment is strong and the chances of an RBA rate cut anytime soon are not high while this remains the case.

But the Reserve Bank maintains a bias to ease because inflation is so low in Australia. Headline inflation of just 1.5% is well below the RBA’s 2-3% target band and there are no signs prices are picking up anytime soon.

There are two reasons that will be worrying the RBA. The first is that Australia does not want to slip toward deflation the way that many nations are., That changes peoples buying and saving habits and opens the spectre of a japan scenario. Luckily though Australia is nowhere near there and the RBA can cut rates.

That’s one reason they have the easing bias. The other reason is that business is saying that there is no pricing power in the economy at the moment. For those of us who believe that inflation is a reflection of the underlying aggregate demand in an economy this is concerning. That’s because it could suggest that the economy is weaker than those pundits like me, who have held a somewhat rosy outlook for the economy, thought. The RBA has been one of those who believed the economic transition is working that the domestic economy is improving and that 2% cash rates and a low dollar are working hand in hand to push the economy forward.

But because ‘lowflation’ suggests there might be risks the RBA has opened the door to a rate cut. Here’s what they said earlier this month.

“At the November meeting, the Board judged that the prospects for an improvement in economic conditions had firmed a little over recent months and that it was appropriate to leave the cash rate unchanged. At the same time, the Board recognised that the economy is likely to be operating with a degree of spare capacity for some time yet and noted that the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand.”

That’s the question for the RBA. Does the economy need further support? Business conditions remain solid and employment is strong. So for the moment the answer is no. But should the economy need another rate cut in 2016 the RBA stands ready to deliver.


Global trade, China and emerging markets are still a clear and present danger

The OECD is forecasting the global economy to grow at less than 3% in 2015. That’s its weakest pace of growth since 2009 – yes, the dark days of the GFC.

“In 2015 global trade growth is expected to grow by a disappointing 2%. Over the past five decades there have been only five other years in which trade growth has been 2% or less, all of which coincided with a marked downturn of global growth,” the OECD said.

That, and leverage in emerging markets is a concern for the outlook as the US Fed moves toward increasing rates in December. Of course nothing may happen but it’s a danger from an investing point of view. Indeed, Credit Suisse says 2016 is “likely to prove to be a watershed in global economic history”

Sounds like it’s time for an adult beverage

Tying it all together: My conviction that the economy has been doing well was tested over the past month with lowflation and some tentative signs of slowing. But strong employment has restored my faith that the domestic economy is making the necessary transition and growing at a healthy rate.

Prepared by Greg McKenna on behalf of Maxim Accounting October 2015

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