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Australia’s business leaders join Positive Pete on the economy!

Peter Switzer
11 July 2022

I know it’s fashionable to call me an optimist when it comes to the economy and the stock market as if there’s something wrong with being so. However, apart from good historical reasons for being positively inclined, right now some of the country’s biggest business leaders are on the same page as me!

The Australian today looked at the views on our economy from CBA’s CEO Matt Comyn and Harvey Norman chair/founder Gerry Harvey, as well as others who agree with me that our economy is doing well, despite a hell of a lot of headwinds.

Like what? Try these:

1. Rising inflation.

2. Big interest rate rises.

3. Falling house prices.

4. A stock market down 12% year-to-date.

5. The Ukraine war driving petrol, power and food prices sky-high.

6. Environmental concerns that also have driven power prices higher.

7. China and its pandemic lockdown issues.

8. The negative wealth and confidence effects on consumers of many of these problems listed above.

Despite these 8 headwinds above, 32 out of 32 economists surveyed last week by the AFR do not see us going into a recession in both one- and two-year timeframes. And now the CEOs of big Aussie companies have told The Australian that even after three interest rate rises, their customers aren’t showing signs that the economy’s in trouble!

Be clear on this: the RBA wants to scare us to limit our spending to bring down inflation. But the business leaders surveyed by The Australian’s Jared Lynch say these recent aggressive interest rate rises aren’t rattling their businesses, which has to say that their customers are coping with the pressure of rising rates from historically low levels.

That said, the RBA has to be careful it doesn’t go too far with this hard interest rate therapy or else the attitudes of consumers and business leaders could go negative.

Helping to fight pessimism emanating out of the two latest big 0.5% interest rate rises are two interesting and positive revelations from Matt Comyn about us.

First, as he revealed: “Many CBA customers had a ‘natural buffer’ with $250bn-$260bn in aggregate savings nationally.”

Second, some three-quarters of loans and therefore their borrowers are approximately two years ahead on repayments, on average.

Meanwhile, Gerry Harvey admits sales might be down this year but that’s compared to a year before when lockdowns made it easy for retailers to sell ‘stuff’.

He put it in perspective this way: “If you get the media out there and they look at results of companies that have got turnovers down 5 or 10 per cent on last year, they say this is a disaster, but it really isn‘t because it’s up 15 or 20 per cent on 2019.”

On Saturday as I wrote in the Switzer Report for our investor subscribers, I listed the week’s big data drops and put them into the two groups of What I liked and What I didn’t like. Many were surprised I only found one dislike!

How did that happen? Well, see for yourself.

What I liked

  1. The Melbourne Institute monthly headline inflation gauge rose by 0.3% in June after rising 1.1% in May. The annual rate fell from 4.8% to 4.7%. I hope this indicator is reliable because we want inflation to slow down.
  2. The Nasdaq rising over 4% for the week.
  3. In May, nominal business turnover lifted in 11 of the 13 selected industries, according to the Australian Bureau of Statistics (ABS). Turnover rose in all sectors over the year.
  4. The ABS says the seasonally adjusted balance on goods and services surplus increased by $2,717 million to a record $15,965 million in May. Australia has posted 53 successive monthly trade surpluses. In the year to May, the trade surplus was a record $136 billion.
  5. National payroll jobs rose by 3% over the year to June 11 and total wages lifted by 5.8%.
  6. According to the Federal Chamber of Automotive Industries (FCAI), new vehicle sales totalled 99,974 units in June, down 9.7% on a year ago. Slower sales are good for lowering inflation.
  7. The S&P Global Australia Services Purchasing Managers’ Index (PMI) eased from 53.2 in May to 52.6 in June. Readings above 50 denote an expansion in activity.
  8. According to ANZ and Roy Morgan, consumer confidence fell 1.2% in the past week, which is another plus for reducing inflationary pressure. This is why I’ve put this on my ‘what I like’ list.
  9. The ISM services index fell from 55.9 to 55.3 in June (survey 54.3). The S&P Global services index fell from 53.4 to 52.7 in June (survey 51.6). These numbers say things are slowing down but they’re not going down too fast.

What I didn’t like

  1. In June, ANZ job ads rose by 1.4% to stand 18.4% higher on the year. Of course, I like job creation because it reinforces my view that we will avoid a recession but we still need to see numbers that say inflation is likely to be on the slide.

What you should’ve seen is that I liked the bad news such as consumer confidence fell, car sales dropped and so on because that’s what the RBA wants to see. It’s a tricky play for Dr Phil Lowe as he has to slow the economy down to reduce inflation but has to make sure he doesn’t go too far and create a recession.

He has to go for the Goldilocks outcome of a ‘not too hot’ economy that fuels inflation but a ‘not too cold’ economy that creates high unemployment rates. Dr Phil has to get it just right.

UBS economist George Tharenou thinks if we see a 3.5% cash rate (as some have predicted), it would lead to a crash in house prices and we’d end up in a recession. But Dr Phil certainly knows that, which is why I think these cash rate predictions are over the top.

And so does Matt Comyn, who should know a thing or two about interest rates, given he runs the biggest bank in the country.

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