The Reserve Bank’s Governor is poised to cut the cash rate for the first time since August 2016. Yep, that’s how long we’ve been on hold with interest rates but the ‘dodginess’ of our economy has been around since November 2011 when rates started their slide — that’s heading towards eight years!
In a perfect RBA world, a period of rates cuts and then a sustained time of being “on hold” should’ve been a precursor to the next move would be up.
Not helping has been unimpressive growth as this chart shows.
The next chart shows how our growth has really been subdued since the GFC, where we’ve been closer to 0% rather than 2% on a quarterly basis.
So who is to blame?
It’s a long list of suspects, so let me list them and name their crimes:
1. Donald Trump and his trade war with our number one trading partner China. This a major reason why the RBA will cut today as the bully boy battle between the two Presidents of the biggest and second biggest economies fight it out, threatening a worldwide recession.
2. Bill Shorten and his threats to property investors, retirees and businesses with his promise of bigger pay rises. Also his strongarm tactics for a needed Royal Commission resulted in very restrictive lending from banks that has not only forced house prices down but has choked economic growth.
3. Justice Hayne and his impact on lending.
4. APRA and its impact on lending that started with Chinese borrowers and investors but ultimately has stopped good borrowers getting money. Bill, Hayne and APRA have helped make changes for the good but they have been excessive and hurt the economy.
5. Tony Abbott gets fingered for being an unimpressive PM compared to his performance as an Opposition leader. He then undermined the Turnbull Government, which explains why even the Libs in his own seat turned against him. I understand why he would’ve been dirty on losing his PM job but he did damage his successor.
6. Malcolm Turnbull, who is a friend, failed to rise to the occasion as PM. He had pressure from inside and outside his party but his handling of the top job was not impressive and unsettled business as a leadership challenge always looked on the cards. The failure of Abbott and Turnbull to look like convincing national leaders undermined confidence at economic growth.
7. The RBA has not shown itself to be as perceptive as it should be. It raised interest rates too quickly after the GFC and then kept them too high before being forced to cut aggressively down to the 1.5% level. For over a year I was ripping into Ian Macfarlane for not cutting rates when it was obvious our economy was slowing and not responding to the then prevailing cash rate.
8. Brexit and the crazy new age world where voters are defying rational thinking and are frustrating pollsters who seemed to have lost the handle on what we think, just adds to a confusing world made even more confusing by Donald, digital disruption and the deregulation of the old world values that made economic predictions seemingly much easier to make.
So, given the above, let’s look at the economic story right now to see why the RBA’s Dr Phil would want to cut rates. Here goes:
• ANZ job advertisements fell by 8.4% in May.
• The Melbourne Institute monthly headline inflation gauge was flat in May after 0.2% lift in April. The gauge’s annual growth rate decelerated from 1.8% in April to 1.7% in May. The smoothed 12-month annual average of the gauge is at 1.9% – the slowest growth rate in almost two years.
• The CoreLogic Home Value Index says in capital cities, prices fell by 0.4% to be down 8.4% over the year to May. House prices fell by 0.5% and apartment prices fell by 0.3%. House prices were down 9.1% on a year ago and apartments were down by 6.4%.
• According to APRA, bank lending to households by credit card fell by 3.9% in the year to April. Lending totalled $39.6 billion in April – an 8-year low.
• Private sector credit (effectively outstanding loans) rose by 0.2% in April (consensus: +0.3%). Lending growth for housing is the slowest since records began in 1976.
• China’s official manufacturing purchasing managers’ index fell from 50.1 points to 49.4 points in May (forecast 49.9). And the services gauge was unchanged at 54.3 points in May (survey: 54.3 points). A level above 50 denotes in expansion in activity.
• New business investment (spending on buildings and equipment) fell by 1.7% in the March quarter after rising 1.3 per cent in the December quarter.
• Council approvals to build new homes fell by 4.7% in April. There has been no change in approvals over the past three months. Annual approvals are now in line with the decade average.
• In the year to April, the unemployment rate for 55-64 year old Aussies was 4.2%, up from 3.6% back in 2013 and above record lows of 2.6%.
• In trend terms, the Internet Vacancy Index (IVI) fell by 1.6% to 81.2 points in April after falling by 1.8% in March (the biggest fall in six years). The index is 5.9% lower than a year ago – the weakest annual growth rate since December 2013.
• Construction work done fell by 1.9% in the March quarter after a 2.1% fall in the December quarter.
• The unemployment rate rose from 5.1% to 5.2% in seasonally adjusted terms.
But there is good news. Let me show you:
• Company operating profits rose for the seventh straight quarter, up by 1.7% in the March quarter. Profits were up 7.8% on the year.
• Over the year to March, real sales were up 1.5% on a year earlier, in line with the decade average.
• The Australian Industry Group (AiGroup) Australian Performance of Manufacturing Index fell from 54.8 points to 52.7 points in May. Any reading over 50 indicates expansion.
• The second estimate of spending in 2019/20 was $99.139 billion, up 12.8% on the second estimate for 2018/19 and the strongest increase in seven years.
• The weekly ANZ-Roy Morgan consumer confidence rating rose by 1.2% to 118.6 points. Consumer sentiment is above both the short-term average of 114.4 points held since 2014 and the longer term average of 113.1 points since 1990.
• The four-week moving average for family finances over the next year rose to 28.2 points – the highest level since February 26 2017.
My analysis says things have been pretty sad with our most recent economic growth readings for six months coming in at 0.5%! However, the good news on the economy suggests we can improve in the second-half now that the election is out of the way, house prices look to be bottoming, tax cuts are coming and APRA looks like its easing off the thumbscrews on bank lending.
And if Donald cracks a trade deal with China, which is looking questionable by the week, our economy might rebound sooner rather later and the RBA might only need one or two cuts to get the economy growing faster.
Anyone who doesn’t like the RBA cutting rates has to accept that they are prepared to gamble with people’s jobs, businesses and their super.
I’m not, so go for it Dr Phil and I hope you get the growth dividend we need.
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