By Peter Switzer
Last week, I revealed how an investment bank was talking to its building clients in Melbourne about a 10-year recession and, at the same time, I heard Treasury whisperings about 10 years of low interest rates! I put these together and said: “I don’t think so!”
However, as I know the economic story can be complex, I thought I’d test out these outlandish views with Morgan’s chief economist, Michael Knox.
He says 10 years of recession is not on his radar but says the building sector could go through a sector downturn, like a recession, for a period of time after a big run up in supply. We have seen a house price spike in Melbourne, as well as Sydney, but the former really has had a huge build up of apartments, so a weak period makes perfect sense.
On the subject of 10 years of low interest rates, Knoxy got more interesting. He says work by a dynamic duo of economists, Carmen M. Reinhart and Kenneth S. Rogoff, showed that when debt gets huge, the way it gets paid back is via a long period of low interest rates!
In the 1950s, after World War II, rates stayed low for nearly 20 years! In fact, for all those who worry about our government debt, Australia’s debt got to 157% of GDP, but we got it right down by the early 1970s, thanks to low interest rates.
He then said this would be bad for the bond market and term deposit rates but great for shares and property! So maybe any downturn in property will be a bit shorter than 10 years. That said, Sydney’s property prices did remain low and only rose by small amounts for the decade between 2003 and 2012 but it didn’t mean life was too tough.
Right now, the economic data looks pretty good for us and corporate profits are tipped to go up by 8% in the next reporting season early next year, so I was interested when Knoxy thought we’d see the next recession.
But before I answer that, let’s just look at the latest run of economic readings to prove my point.
- The CoreLogic RP Data Home Value Index of capital city home prices rose by 0.5% in June after lifting by 1.6% in May and 1.7% in April. Home prices were up by 8.3% over the year to June, which means the home sales market is not in bad shape, despite the regulators’ attacks on investors and foreign buyers.
- The Performance of Manufacturing index edged up 0.8 points to 51.8 in June. A reading above 50.0 indicates that the sector is expanding. The index has been above 50 for 12 months – the longest period of expansion since September 2006!
- The March economic growth number we got was a 3.1% result for the year, which was way over the 2.5% level many economists predicted. If you take the last six months and multiply those two quarters of growth, you get 3.4%. That’s the preferred measure of the Reserve Bank. (Growth over 3% means unemployment should fall, if history holds true.)
- The RBA says: “While GDP growth had been stronger than expected in the March quarter, reflecting unanticipated strength in resource export volumes, it was expected to have been more modest in the June quarter. Economic growth was expected to pick up to be above estimates of potential by mid 2017.” The RBA says growth will be between 2.5-3.5% over the coming year.
- Unemployment defied critics, dropping from 5.8% to 5.7% in March. This time last year, economists were telling us to hold our breath for a 6.5% top out for the jobless rate.
- Employment rose by 26,200 in July after rising by 10,800 people in June (previously reported as a rise in jobs of 7,900). Full-time jobs fell by 45,400, while part-time jobs rose by 71,600. Economists had tipped a 10,000 increase in jobs.
- On average, in 2015-16 there were 139,400 people aged 15-19 who were unemployed, down 13,300 or 8.9% over the year – the biggest percentage decline in 17 years.
- The ANZ/Roy Morgan consumer confidence rating rose by 3.6% to 121.8 in the week to August 21 – the highest reading since late 2013. Confidence is up 7.8% over the year and well above the average of 112.4 since 2014. The measure of whether it was a good time to buy a major household item, lifted to the highest reading in 3½ years.
- New home sales rose by 8.2% in June, according to the Housing Industry Association.
- Car sales are around record highs. The number of luxury car sales in the year to July was 104,277 — up 15.7% over the year.
- Tourists from mainland China and Hong Kong rose to a record 1,389,200 over the past year (up 21.4% over the year) and now well ahead of tourists from New Zealand (1,321,700 visitors over the past year).
- The NAB business conditions index fell from +10.9 points to +8.4 points in July (long-term average +4.9 points). The business confidence index fell +5.4 points to +3.8 points (long-term average +5.7 points). The survey was conducted from July 25-29.
- The Consumer Price Index rose by 0.4% in the June quarter, in line with expectations. In seasonally adjusted terms, the CPI rose by 0.6%. The annual rate of inflation fell from 1.3% to 1.0% – equaling the low set in June 1999. So inflation stands at a 17-year low.
- The wage price index rose by 0.5% in the June quarter after a similar rise in the March quarter. Annual wage growth held at a record (18-year) low of 2.1% but the gap between annual wage growth and inflation is 1.1 percentage points – the biggest margin in 3½-years (December 2012).
- Construction work done in the June quarter fell by 3.7%, to be down 10.6% on a year ago.
- Total lending finance fell by 4.7% in June - the third consecutive fall. Lending totaled $64.2 billion in June, down 12.6% over the year and holding at a 19-month low.
- Retail sales rose by just 0.1% in June after a 0.2% lift in May. Sales have lifted 2.8% over the past year. Non-food retailing rose by 0.6% in June.
As you can see, there are some softer statistics but nothing screaming out “beware!” Also, some of the weaker data links up with the long election period that can always hurt parts of the economy.
On an international basis, we have a pretty good economy - better than most Western economies we compare ourselves to, and our Government debt to GDP is again one of the lowest in the Western world (under 40% of GDP). The likes of the US and the UK are closer to 100%!
Anyone who wants to talk down this economy has a vested interest to do so. It’s not going gangbusters but it’s nowhere near the proverbial gurgler!
So when might we see a recession? Knoxy quoted former US Secretary of the Treasury, Larry Summers, who thinks his beloved economy will run out of puff by 2018 and that could be bad news for us as well. If the Yanks can pull off a couple of rate rises over 2017 and we cut our rates, as many experts think, then our dollar goes lower and helps us grow, but if the Yanks start sneezing, then we will catch a cold wind of economic decline.
But given we haven’t had a recession since 1991, maybe it will be time by then.