11 April 2020
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Interest rate cut whingers mustn't care about unemployment, bankruptcies, bigger budget deficits and debt!

Peter Switzer
6 June 2019

There’s been a lot of whinging about the Reserve Bank cutting interest rates. Of course, none of it is coming from those who will enjoy lower repayments on their loans but I can understand why older savers would be cheesed off. Term deposits are just over 2%, which means retirees have to take more risks in stocks and other investments that aren’t as safe as bank deposits.

To make matters worse, ANZ has reduced their loans by only 0.18% rather than the full 0.25% but it cut the savings rate by the full 0.25%! That decision can’t be great for their brand.

Nervous types ask what happens if a global recession comes along and we’re out of firepower to cut rates to help growth? That’s a good question but we could be in the start of a recession and a stitch in time could save nine. With the cash rate at only 1.5% before Tuesday’s cut, we only had six 0.25% cuts to play around with.

Dr Phil Lowe would only be cutting if he thought the economy’s slowdown needs help and a rate cut or two has to be a part of the repair job for the economy. Some economists tip three or four cuts are coming but I think we’d need to see a full blown trade war eventuate, which would deliver a global recession, to make those cuts show up.

The IMF recently sent a note to G20 finance ministers and central bankers telling them “taxing all trade between the world’s two largest economies would cause some $455 billion in gross domestic product to evaporate. This would be a loss larger than South Africa’s economy, it said.” (CNBC)

Two days ago we learnt that the US central bank boss is so worried he’s now talking about the possibility of a rate cut there. That’s why the Dow  Jones Index was on track for the best two-day gain since January.

To the market, the simple logic is that a trade war takes stocks down and rate cuts take the market up.

And private payroll data out of the US shows the economy is starting to feel the effects of the trade war.  According to data from ADP and Moody’s Analytics released Wednesday, May’s private sector job creation came in at a low 27,000 but economists polled by Dow Jones expected an increase of 173,000 jobs! This result was the worst since March 2010!

It looks like Dr Phil and his central bank buddies have had a pow wow and agreed that cutting rates early to avoid a recession makes sense.

Let’s look at the Oz economy to see how it’s doing. My view is that there are plenty of worrying economic developments but some promising ones that could really be helped by Dr Phil’s cut.

Let’s start with the bad, so here goes:

       ANZ job advertisements fell by 8.4% in May.

       The annual growth rate of inflation fell from 1.8% in April to 1.7%.

       Credit card growth fell and is at an 8-year low!

       Housing loans growth is at its slowest ever, since records began in 1976!

       Chinese PMI fell from 50.1 to 49.4 which means manufacturing is contracting!

       Council approvals to build new homes fell by 4.7% in April.

       Unemployment rose 5.1% to 5.2% in April.

       Weakest Aussie economic growth at 1.8%, which is the worst in 9½ years.

       Weakest new vehicle sales in 9 years.

       Business and consumer confidence has been weak pre-election.

This chart of business confidence shows how business was super negative before the election.

Now for the good stuff, so here goes:

       Company profits were up 1.7% in the March quarter and are up 7.8% for year and up 7 quarters in a row!

       Real sales, that is ruling out inflation’s effect on sales, were up 1.5% on a year earlier, in line with the decade average

       There was biggest lift in the services sector in 29 months, up 6 points to 52.9. Any number over 50 means expansion for the sector.

       The Performance of Manufacturing Index fell from 54.8 points to 52.7 points in May but was still expanding, albeit at a slower rate.

       Planned investment by business was up 12.8% for the year ahead, which was the strongest increase in 7 years!

       The four-week moving average for family finances over the next year rose to 28.2 points – the highest level since February 26, 2017!

       The weekly ANZ-Roy Morgan consumer confidence rating rose by 1.2% to 118.6 points after the election result. The longer-term average is 113.1 points since 1990.

       And while economic growth has slowed annually on a by quarter basis, there has been improvement. The September quarter last year grew at 0.3%. December came in at 0.2% but the latest we saw this week — the March quarter — registered a 0.4% rise. That said, the June quarter had the negative impact of a brutal election campaign, so that could be another reason why the RBA thought the economy needed some help.

All this stuff is good but not great. It shows the economy has potential to lift but it needs help. And in many ways the collective mentality of Aussies voting on May 18 might have got the message that Bill Shorten’s more economically tough policies were not what the doctor wanted or what Dr Phil needed to keep us out of recession.

Bill’s negative gearing and capital gains discount reduction policies on top of his killing of franking credits for retirees wasn’t going to be good for business and investing, especially after January 1 next year.

I expect the following will mean that the RBA won’t give any more than two cuts:

• A Trump trade deal will happen.

• The ScoMo confidence rebound is already helping and will continue to do so.

• The house price slide is slowing. Even the AFR today is talking about a bottoming process showing up now.

• Consumers who might be in mortgage stress, should be less stressed, which should help consumption.

• The lower dollar is another boost to the economy going forward.

• Infrastructure spending was promised in the Budget; and

• Tax cuts are coming, provided the Parliament passes them. A single income household will receive up to $1,080 a year and there’s $2,160 for dual incomes via the doubling of the low and middle income tax offset.

There’s reason to be apprehensive about the economy, which is why Dr Phil cut the cash rate on Tuesday. But there’s enough positive stuff going on in the economy to suggest that rate cuts, tax cuts and no infernal trade war will see us pull out of this softer economy by year’s end.

For the savers, who I understand are unhappy about rate cuts, if the RBA ignored what’s going on, a severe recession could result. This would drive unemployment up along with bankruptcies, which would blow out the near-surplus Budget and add to our pile of national debt.

Under those circumstances, we could see here what we couldn’t believe in Europe and the USA after the GFC — zero interest rates and even negative interest rates!

I think the old proverb “a stitch in time…” has modern day relevance.

Peter Switzer's book Join the Rich Club is on sale for 30% off from the Switzer Store until the end of Easter. Click here to pick up a copy today!

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