Just as Australia got another poor economic growth number, prominent local economists see another interest rate cut coming. And it comes as a former US central bank boss, Alan Greenspan, says negative interest rates will happen in the US in time.
If that’s right, I’d be surprised if we can dodge that hard-to-believe bullet.
For those who missed the ‘drama’ of the National Accounts yesterday, which brings us the numbers to work out our economic growth rates, the June quarter saw the Oz economy grow at 0.5%. This took our growth rate of 1.7% for the 12 months to March down to 1.4%.
This is a bad number, helped by a great export showing, mining investment and government spending. However, it’s worse than it looks because here in Australia we add up the past four quarters and, until this quarter, we had a big 0.9% growth in the July quarter of 2018, pumping up the annual growth number. That has now been replaced by the 0.5% number we got yesterday, so it makes a bad number look worse.
In case you’re not economists, our mob like annual growth just over 3%, as historically it has meant unemployment falls. So, if you’re not worried about a low 1.4% growth figure, then you’re possibly very rich, you don’t care about your fellow Australians who could end up on the scrap heap, or you’re a short-seller of stocks hoping to get rich out of a stock market rout, if these numbers are a prelude to a recession.
Westpac’s chief economist Bill Evans thinks the 1.4% growth screams another rate cut is coming and it’s hard to argue against him. But I’d say three things.
First, our Reserve Bank Governor, Dr Phil Lowe, would love not to cut rates again. Second, to avoid another cut, the economic case has to improve for our economy over the next one-two months. And third, Donald Trump might be our only hope to stave off another rate cut.
Let me explain. On Dr Phil not wanting another rate cut, he can only avoid that if our economy unambiguously looks stronger but if that’s possible, we might need more time than two months.
As August has just ended, we’re generally dealing with only July data at best and to expect the tax cuts to be working yet is too much. If those tax cuts (ranging from $255 to $1,080) are going to give the economy a much-needed boost, you have to see better spending over August and September. Phil might string it out until November to see if October brings more spending, meaning Cup Day will bring not only a four-legged lottery drama but a “will they cut?” media frenzy as well.
And then there are the June and July interest rate cuts, which have helped auction clearance rates spike in Sydney and Melbourne and must have helped house prices rise in those two states, as we saw this week.
This is how CommSec’s Craig James saw it this week: “The CoreLogic Home Value Index of national home prices rose by 0.77% in August - the biggest increase since April 2017. And capital city home prices rose by 1.01% – the biggest lift since March 2017. But regional home prices fell by 0.1%.”
Also, the 0.5% growth number for the June quarter looks better if we use the US method of multiplying the quarterly figure by four to give you an annualized result of 2%. The RBA adds two quarters together and multiplies this by two to get an annualized number — and that too would be 2%.
Our real growth might be more like 2% rather than 1.4% but it’s still under the magical 3% number that brings unemployment down.
I reckon tax cuts, two rate cuts and a dollar at 67.98 US cents should be good growth stimulators but this Trump trade war is hurting global economic growth and business confidence, which then KO’s the prospects for business investment.
On that subject, last week we saw planned business investment here spike. “The third estimate of spending in 2019/20 was $113.4 billion, up 10.7% on the second estimate for 2018/19 and the strongest growth in seven years,” Craig James noted. And this was a good omen but plans are not the real McCoy.
The US Federal Reserve is being pressured by Donald Trump to cut interest rates to offset the negatives of the trade war so if a trade deal was made, the pressure for cuts would decrease, as the stock market would be heading skyward.
Alan Greenspan thinks the slow global growth explains why there are $US16 trillion worth of negative-interest rate bonds (or their equivalents) around the world. The demand for gold shows worried investors just want to protect what they’ve got. That’s why Donald better end this trade war madness soon or else we’ll see negative interest rates as a forerunner to a serious recession.
Central banks will try to avoid this but they are running out of firepower. A trade deal would be the circuit-breaker we had to have.