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Is our economy strong enough to take its first rate rise?

Read all about the good and the bad of interest rates that go nowhere

Peter Switzer
3 April 2018

The good news is that interest rates are not going to rise any time soon. The bad news is that interest rates are not going to rise any time soon!

You might be asking: Has Switzer gone mad?

And I’d say 'no,' but that doesn’t mean I’m not mad at the counterproductive role that the tweeter President Donald Trump is having on stocks and economic confidence. But, in an economic sense, I argue that I remain sane.

Let’s put Donald to one side while I look at our local economy’s recent run of data. Last week I looked at our 'red hot' improving economy, as I put it. And only yesterday we learnt that the Australian Industry Group Performance of Manufacturing Index rose to a record high 63.1 points in March, up from 57.5 points in February.

Also, ANZ Job Advertisements were flat in March but are still up 11.5% on a year ago. And even though we also learnt that house prices are coming off the boil, that’s exactly what the Government, APRA and the Reserve Bank wanted; to avoid a house price bubble.

In a sense, good sense is returning to the Sydney and Melbourne markets.

The CoreLogic Home Value Index of capital city home prices fell by 0.2% in March to stand 0.8% higher over the year. It was the smallest annual growth in national prices in over five years.

Here are the annual rises for our capital cities:

• Hobart up 13%.

• Melbourne up 5.3%.

• Canberra up 2.9%.

• Adelaide up 1.7 %.

• Brisbane up 1.3%.

• Darwin down 7.5%.

• Perth down by 2.4%

• Sydney down 2.1%.

This is an orderly retreat in prices growth and does not pose a threat to our economic outlook. The bad news is that interest rates are not going to rise any time soon!

In fact, it’s good news because the Reserve Bank can forget about raising interest rates to cool down a too hot housing market, which could kill off the improving overall economy. Goldilocks lives in our economy, where things are neither too hot or too cold but just right!

With housing looking sensible, the Reserve Bank can focus on the economy looking for the signs that justify its first interest rate rise of this cycle.

I’d been hoping for a rise in September but I’m ruling that out, though I’m not giving up on a Melbourne Cup day rate rise.

For that to happen, our economic growth has to pick up even more than it already has. The December quarter annual growth was 2.4% but the experts think this steps up towards 3% this year. If it happens, that should help employment even more, kick along wages growth and make it possible for the Reserve Bank to seriously think about one interest rate rise.

While the growth numbers are old, the latest employment figures rose for a record 17th straight month, up by 17,500 in February after rising by 12,500 in January. Over the past year, a record number of 420,700 jobs were created and the participation rate is now at a seven-year high.

It comes as the business conditions reading is at a recent record high and consumer confidence has turned positive, with the trend that way since October.

The signs are getting better. And while it’s bad news that our economy isn’t strong enough to take its first rate rise, it’s happening among a lot of good news that points to a rosy economic future. So the RBA not moving now, prematurely, actually is good news.

This is where the pesky President Trump is the ‘fly in the ointment’ for our economy and our stock prices. His antics, which are driven by his problematic poll numbers and the fact he has a mid-term election in eight months’ time, means he is swinging at targets to help his vote-catching.

When he talked tax cuts, deregulation and infrastructure spending, stocks soared. But when he talked Kim Jong-un, tariffs, Amazon and tax-dodging tech companies, he KO’d stocks and confidence.

Even overnight, Wall Street rebounded from the big sell off yesterday, caused by a Trump tweet against Amazon. And when he came up with another anti-Amazon tweet, the Dow immediately dropped. He might know what he’s doing but the stock market doesn’t and this ‘beast’ hates uncertainty and can create confidence problems.

However we don’t need confidence problems if we want our economy to go to the next level, which will bring more growth, more jobs, higher wages and better stock prices.

The only plus from Donald’s mad, bad behaviour is that it could stretch out the length of the bull market, provided his mad tweeting doesn’t get so seriously threatening that stocks and the economy give into gravity. If investors start heading for exit doors to safe havens a long way from stocks, this bull market could turn into a unbearable bear one!

Donald, please stop tweeting!

P.S. Late in the trading day in the US, the President tweeted that the White House wasn’t after Amazon and its share price rocketed higher. Does this sound like madness to you?

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