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Just how bad is our economy? Not very!

Peter Switzer
24 June 2015

By Peter Switzer

With Greece doing the right thing for our stock market and the US clearly continuing to deliver economics-wise, let’s see if our economy is on the mend and heading in the right direction.

My best-case scenario for our stock market future gets down to this checklist:

  • Greece doesn’t derail the Eurozone’s economic improvement and stock market.
  • China doesn’t fall into a slower than expected growth rate.
  • The US keeps growing nicely and raises rates sometime this year.
  • Because of the above US development, our dollar falls to make import-rivaling businesses and exporters more competitive and more profitable. It will also favour stocks that earn a lot of profit overseas.
  • Our economy picks up to head towards 3% growth, rather than falling below 2%.

If all these things happen, then I think our market will take out the 6000-level and head higher.

So how is our economy progressing? Look at these numbers from the data files:

  • Employment rose by 85,900 over the three months to May after an 85,800 gain in the three months to February – the biggest six month gain since November 2010.
  • The unemployment rate fell from 6.1% to 6% in May.
  • Job ads are up 14.1% on a year ago. In trend terms, ads rose by 0.4% in the month, the 19th straight gain.
  • Initial results of the Commonwealth Bank Business Sales Indicator (BSI) for May (a measure of economy-wide spending) shows that sales across the Business Services sector posted a 1.9% trend increase during the month – the biggest increase in three years. CommSec’s Craig James reported: “There are early signs that businesses have responded to the stimulus contained in the Federal Budget.”
  • New car sales fell by 1.3% in seasonally adjusted terms in May but in trend terms, sales were at 2-year highs.
  • The Westpac/Melbourne Institute index of consumer confidence fell from a 16-month high, down by 6.9% in June to 95.3 and is up just 2.3% on a year ago. A reading of 100 is the dividing line separating optimism from pessimism. However, this is the RBA’s view:Measures of consumer sentiment had picked up noticeably in May to be a bit above average. Much of this had been attributed to the Australian Government Budget and, in particular, the announcement of tax concessions for small businesses.” 
  • The business conditions index rose from 3.4 points, to a 9-month high of 7.4 points in May. The business confidence index rose from 4.4 points to 6.6 points in May, above the long-term average of 4.5 points. 
  • Economic growth for the 12 months to the end of March was a higher than expected 2.3%, with the March quarter up 0.9%. If you multiply this by four to get an annualized pace of growth, it’s 3.6%. We need growth over 3% to decrease unemployment, so this is good news and if the Budget helps the June quarter, then it will help a snowball of confidence get rolling.
  • Retail sales were flat in April after 10 prior months of gains. Annual spending growth eased from 4.4% to 4.1%, mildly below the decade-average growth rate of 4.4%.
  • Tourism flows are up 11.9% on a year ago – the strongest growth in three years.
  • The value of all Australian homes stood at $5,468.5 billion in March, up 8.4% on a year ago. More valuable homes have boosted the average wealth of each Australian family by $18,000 over the past year.

Clearly, most of this story is positive but the big concern has been the impact of the mining boom on business investment. This has to be watched, and hopefully the Budget’s pro-small business policies, and the rise in business confidence, could help keep growth heading in the right direction.

Undoubtedly, unhelpful negative talk about the Budget, our debt, a possible housing bubble in Sydney, and the like, are not helping consumer confidence. 

However I think there’s a good supply of positives out there on our economy.

So when people ask me how bad is our economy, I reply: “Not very” and the above shows why.

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