Maxim Monthly Market Insights - October 2015


Maxim Monthly Market Insights

  • Malcolm Turnbull might have timed his run at the lodge perfectly as business conditions improve and the Australian dollar supports the economy.
  • Australia has climbed to the top of global debt league tables and housing debt is restraining spending but employment can assuage fear of job losses.
  • The lower Aussie dollar is the nation’s secret economic weapon and the shock absorber to a weak external growth environement


Will the change to the new Turnbull Liberal government and ministry affect small business?


Malcolm Turnbull probably couldn’t have picked a better time to challenge Tony Abbott for leadership of the Liberal party and thus the job of Prime Minister.

That’s because even though the data for June quarter GDP printed an anaemic growth rate of just 0.2% dropping the annual growth rate to 2% signs are emerging that in the months since the lower Australian dollar is starting to give local businesses a real boost.

Data released this week showed that Australia’s services sector expanded for the 4th month in a row during September the AiGroup PSI showed. That’s the “longest period of continuous expansion since March
2008.” Before the GFC!!!

Likewise, manufacturing in Australia expanded for a third month in row during September which is the first time this has occurred since July 2010. Indeed, manufacturing is doing so well “Six of the seven activity sub- indexes expanded in September.”

sdasdad.pngBoth these outcomes, of business strength not weakness, gel with the message from the NAB business survey which is that business conditions of 10.7 are much stronger than the post GFC average of just 0.3. Whether it’s the Reserve Bank, the NAB or the AiGroup the resurgence in Australian business at the moment is in large part a result of the big fall in the Aussie dollar.

That gives the confidence boost that PM Turnbull, and the change in narrative which has accompanied his ascension to the top job in Australian politics, has given both business and consumers a solid base to build on. So, while global events are still very important for business and consumers in Australia in all likelihood if the new PM can build on the momentum he already has this, and the lower Aussie dollar, should materially improve operating conditions for                                                                                                                                    Australian business.


Australian housing, debt and growth.


The debate over Australia’s housing market, its prices and whether or not there is a bubble in Sydney, and some parts of Melbourne, continues to weigh on regulators minds.

With that rise in prices has come an associated increase in household debt which has taken Australia to the top of global comparisons.

That’s okay in the current low interest rate environment with the RBA cash rate at a modern day low of 2%. But, all that debt has to be repaid.

So, it acts as a handbrake on consumption and economic growth. Heaven forbid the impact if rates rise.

Indeed, earlier this year RBA assistant governor Christopher Kent said monetary policy was still working but there were significant headwinds and, crucially, the transmission mechanism wasn’t working as well as it might – think slippery clutch in the car.

Kent said this level of debt and concerns about unemployment are combining to restrain household spending and boost saving.

Kent intimated that Australians have too much debt and are concerned about paying it back.

He added that even with the strong growth in employment for whatever reason, Australians are really worried about losing their jobs. That would threaten their ability to repay their debt, feed their family, and keep their house.

Debt is a big hand brake on domestic growth. So, hopefully the strong employment and improved business outlook from the lower Aussie dollar and improved business conditions can work to improve consumer confidence.

The reality is that The global growth backdrop has deteriorated.

China and emerging market growth looks set to continue to be weaker than expected 6 months ago and there are signs the US economy might be shifting to a slower growth profile again as well.


But, here in Australia the evidence suggests that while offshore events continue to buffer the economy the lower Australian dollar is playing its important shock absorber role for the economy and growth. It’s still a glass half full economy.



The dollar is now back in the price zone which provided substantial support, and an economic stabiliser, during the dark days of the GFC.

RBA research shows a sustained fall of 10% buoys growth by 1% or more in the years following that fall. Evidence from the AiGroup surveys suggest the Aussie dollar is a big part of the improvement in services and manufacturing. AiGroup CEO Innes Willox said recently:

“This broadening of the sources of domestic growth is an encouraging sign of an economy responding favourably to the stimulus of low interest rates and the further fall in the Australian dollar...Local tourism, retail and other consumer services are noticing the benefits of the lower dollar offsetting the higher local currency prices of imported inputs.”

Most forecasters, and the Reserve Bank, are looking for current levels to be sustained with many expecting further falls. That’s good news.


Tying it all together: I’ve been consistently optimistic about the Australian economy. I continue to believe the massive fall of the Aussie dollar will help the economy stabilise from the many headwinds it now faces. The change in leadership in Canberra has changed the ‘vibe’ in the economy.

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