The latest NAB business survey has made me jump ship from being a “rates are on hold” guy to “let’s cut”. And don’t pussyfoot around with it, Dr. Phil.
Six months ago, apart from falling house prices, the economic data was overwhelmingly positive. But the case for cutting has got so strong in a space of a couple of weeks that I think it would be madness to wait for the March readings on an economy that is slowing down.
A few weeks ago, before the latest economic growth number, I thought it was worth waiting. September’s growth number was a weak 0.3% but September can be a dodgy quarter. December is usually a better one and that 0.2% growth number bothered me.
We saw that the January business survey by NAB showed a bounce back for business conditions and confidence. If that trend had continued, I would’ve stayed as an “on hold” guy. But I got no cigar with this one.
The NAB business conditions index eased from +6.6 points in January to +4.4 points in February. Worse still, that result is below the long-term average of +5.8 points. Meanwhile, the business confidence index fell to a 3-year low of +2.0 points in February, down from +3.6 points in January and below the long-term average of +6.0 points!
That’s not great and can’t be ignored.
Recently I interviewed Glen Sealey, the MD of Maserati, who says the sale of luxury cars closely follows house prices and business confidence. He pointed out that sales were down about 20% from their pre-house price fall levels but after St. Valentine’s Day, there had been a pick up. This coincided with a better business confidence reading in January, reported in mid-February and a recent rise in auction clearance rates.
Obviously, it was early days wishful thinking. But if business confidence kept tracking up in February, I wouldn’t be canvassing a rate cut ASAP.
Today we get the latest Westpac consumer sentiment number. If it’s a shocker, I’ll ramp up my calls for a cut in rates. Two weeks ago, the bank’s chief economist Bill Evans said two cuts should happen this year and last week NAB’s head honcho of economics, Alan Oster, joined the ‘cut crowd’.
Adding to my newfound concerns is the weekly consumer confidence reading from the ANZ-Roy Morgan mob, who tell us that the weekly consumer confidence rating fell by 4.6% – the second biggest fall in three years to 109.5 points.
Worst still, consumer sentiment is below both the average of 114.3 points held since 2014 and the longer-term average of 113.1 points since 1990. Consumers’ views on current economic conditions fell by 7.9% to 94.6 points – the lowest level in 74 weeks.
But wait there’s more!
The value of lending to households fell by 2.4% in January after a 3.6% decline in December. Lending for housing fell by 2.1% Investor lending was down 4.1% and lending for owner-occupier dwellings fell by 1.3%.
Anyone reading this might be thinking he’s changed his tune and they’d be right. But I’ve always argued that I’m not a perma-bull and if the facts changed, I could change. The great economist John Maynard Keynes reportedly replied to a critic who gave him stick for changing his view on an economic call, with this pearler: “When the facts change, I change my mind - what do you do, sir?”
(Some pedants question whether he did say this and if he didn’t say it, well he should have!)
My changed view on rates is to make sure that this soft patch doesn’t get out of hand and I reckon a stitch in time will save nine. That’s good because we don’t have nine rate cuts available at 1.5% for the cash rate. Presuming they are 0.25% cuts, we only have six!
A few months ago, when the stock market was rebounding, good news outweighed bad news. I think Donald Trump signing a trade deal on March 27, the Fed on hold with rates, the EU stimulating Europe’s economy and China doing the same, sets us up for an OK year for stocks. However, locally, I reckon the Canberra PM crisis, the threat of Bill Shorten’s policies, the problem that elections cause for spending (and we have one in our biggest state NSW and Australia in May), on top of a sizeable house price fall that can’t help confidence, all mean negativity is starting to trump positivity.
My interview with Gerry Harvey last week, whose Harvey Norman is surveyed by the RBA and Treasury to gauge how the economy is going, made the emphatic point that he believes Dr. Phil will have to make two cuts this year and the recent flow of economic data supports the prodigious retailer’s argument.
The NAB team thinks the first cut will be in July and another in November. I say, why wait? While a lot of indicators are still looking good (e.g. employment, unemployment, job ads, plans for business investment, tourism numbers and trade figures), a cut or two means we could easily see a rebound in growth in the second-half of 2019.
And if Bill Shorten delays his changes to negative gearing or the Senate makes him do this until the property market is healthier, then our economy could be looking good for the start of 2020.
If Dr Phil waits until the patient (the economy) is really sick, then it might be too late to save the poor blighter!
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