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Are rate cuts on the cards?

Peter Switzer
7 March 2019

Yesterday’s economic growth number was a disappointment and makes Bill Evans, the Westpac chief economist, who tipped two rate cuts this year look like a genius. However, the RBA Governor is not in the cutting camp yet. But the March quarter economic numbers are bound to settle the matter.

In case you missed it, following the weak September quarter growth of 0.3%, December came in at 0.2%, which was a tick below the 0.3% the consensus of economists had tipped. This means for the 12 months of 2018, the growth rate was 2.3% and Dr Phil Lowe needs a strong March and June quarter, if his tipped 3% growing economy is to show up.

I think he will be disappointed, though early signs for the March quarter are looking better than what we saw in the three months ending December 31.

The January consumer confidence, which is more influenced by the month of December, saw a slump from 104.4 to 99.6. When the number goes below 100 on this Westpac measure, pessimists outnumber optimists. February saw a rebound in confidence with a reading of 103.8.

Business confidence and business conditions readings also turned down towards the end of the year but recently kicked up again as this chart shows.

The NAB business conditions index rose from a four-year low of +2.6 points to 6.6 points in January, where the long-term average  is 5.8 points, which I hope is a sign of things to come. That said, I have often warned that “hope is not a strategy” worth investing on but the recent run of data does give reason to keep your fingers crossed that the worst is behind us.

Remember this was the quarter where our stock market fell about 14%, where the US market nearly snuck into bear market territory, down 20%, when President Trump was talking up a trade war and the US central bank’s expected interest rate rises were making some economists tip a recession in 2019! It wasn’t great for positivity.

Meanwhile, we had the big wait for Royal Commission recommendations, house prices were falling, helped along by a media that lapped up the bad news. And we had and still have a looming election with Bill Shorten promising big policy changes. You don’t have to be Terry McCrann or Ross Gittins to work out why the December quarter only grew at 0.2%.

But Dr Phil remains confident that things will improve or else he would’ve cut rates on Tuesday.

In a speech this week for the AFR Business Summit, he still thinks the house price fall will not deliver Armageddon because, unlike other house price dives, unemployment is not rising, nor are interest rates. What he needs to see is wage rises to be right about house prices and so Labor’s promise to deliver that, if it wins the election, might be a help.

In reality, Dr Phil would prefer the market to give the wage rises rather than a caring and sharing Shorten Government because too rapidly rising wages could cause interest rates to rise too fast and that might give us the recession that looks long overdue!

Dr Phil thinks wages will rise this year because the labour market is tightening, with NSW’s unemployment rate at a 40-year low of 3.9%! HSBC’s chief economist in Oz, Paul Bloxham, says he trusts the labour market stats more than the GDP numbers in trying to work out how the economy is going.

Economists like Paul point to the fact that real gross national income rose by 1.1% in the December quarter to be up 3.5% on the year. And in nominal terms, GDP increased by 1.2% in the quarter and rose by 5.5% over the year.

Gotta hope Phil and Paul are right!

And for anyone who likes backing long shots at races, they might like to know that a house in Sydney with a reserve of $1 million shocked a big crowd on the weekend going for $400,000 over the reserve. One of my staff members went along hoping for a bargain in this scary, crappy housing market but he and his wife left gobsmacked!

And the boss of Maserati, Glen Sealey, in a recent interview, told me that conditions have been tough since house prices and business confidence dipped but sales have been on the rise since Valentine’s Day!

This coincides with news of improving auction clearances and the bounce back in business confidence and conditions.

I know this is me at my optimistic best but at least I have Phil and Paul in the same boat and they are pretty smart.

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