Today Governor Lowe and the Reserve Board met for the first Tuesday of October and they've
cut the cash rate. Now, 75% of economists believed that this was going to be the case.
If you were listening to some of the commentary last week from Governor Phillip Lowe around
his concerns in the market, it was pretty clear that he was signaling to the market
that he was going to cut the cash rate, and that's exactly what the RBA did.
So, let's take a look at the economic data in the readings to see exactly what's happened
in the economy over this past month. Let's look at the GDP numbers that came through
for the June quarter. They weren't necessarily great numbers, but that's on the back of the
uncertainty we had coming into the end of last year and moving through — so that's
all of our lag data that I've been talking about. GDP growth for the June quarter was
only 0.5% — so the economy is still growing, but it has meant that the annualised rate
of growth has moved from 1.7%, which we saw in the March quarter, now down to 1.4%. It
is the slowest growth rate that we've seen in economy for nearly 10 years. Obviously,
work needs to be done.
Turning our attentions to the global market, what we’re seeing is continued uncertainty
in regards to what's happening with the global growth story — and that, which we saw earlier,
led to the Fed Reserve reducing their interest rates. We saw the European Bank also reduce
their outlook, in terms of monetary policy easing. And we saw China also do some movements
around easing some of their monetary policy levers to try and stimulate growth. So overall,
the story for the RBA is around an easing policy — or an easing bias going through
globally. That obviously means that Australia is caught
up in this global slowdown. And that was one of the reasons behind the
thinking around the RBA's decision today. To the other big news of the moment… it’s
still the impeachment or the potential impeachment of President Trump in regards to some of the
comments that he's made in negotiations. The other thing that is quite interesting from
positive point of view is that there’s been some indications that the trade war that's
going on between the US and China may be coming closer to an end. So that could be “closer
than we think” is what the commentary or saying there. So that would be a very, very
positive sentiment story. If there was some type of settlement, I suspect you'd see some
more optimistic commentary coming out and moving sentiment in terms of the global growth
story. So that's what's happening globally and one of the big reasons for today's decision!
In addition to that, the other big mover is really around the labour market.
So we've been talking about this for some time now, but the decision we saw today relates
to the job number data that came out. With our unemployment rate, growth remains pretty
strong. In terms of job growth, we had 34,700 jobs created for August — and the average
jobs growth that we've seen since the start of 2019, has been 26,400 jobs being created
every month. So that's the good news story. The challenging part is really around the
participation rate — so we've again seen a record-high level participation rate of
66.2%. So that is, in itself, the story of the greater population and more people arriving
here and looking for work. So that has meant that the unemployment rate moved from 5.2%
to 5.3% percent. So that's not a great number and this has obviously been weighing on the
RBA’s minds. In addition to that, job vacancy data — we did see that at the end of August,
this being reported as falling 1.9% and it's the second quarterly decline in terms of job
ads annually. It’s 1.9%, which is the first annual decline that we've seen in five and
a half years. Expanding on that more, is still a little
bit of a negative story — skilled labour; so skilled vacancies. So skilled vacancies
edged down 0.1% in August, and that's on the back of a negative number in July. So there's
eight straight months of decline in skilled job vacancies as well. So, again, this is
where the challenge lives. I mentioned earlier what Governor Lowe was
talking about last week in the speech… he was talking about further progress towards
full employment and to achieve the inflation target over time is one of the catalysts for
their decision today. So Governor Lowe does believe that the economy is on the way — it's
at a turning point, but in terms of how strong that growth is and how gentle it is — he
was referring to a gentle turning point of economic growth. So we'll see how that plays
out and what that does over the course of the next couple of months and then leading
into the next couple of years.
To move on from the labour market where the story isn't so great, let's also look at the
consumer confidence survey from Westpac and the Melbourne Institute. We again saw a decline
of 1.7% — that's now moved the margin down to 98.2, which is below the 100% mark; which
separates expansion from contraction. So that's where the tax offsets — the tax cuts, those
bonuses that we saw, or the offset that we saw coming back in — hasn't really materialised
into some of the data just yet. So the economic data is not showing that come through now.
It is materialising in some way, right? The money is going somewhere, so whether it's
going into consumer spending or paying debt off, it will come down through the numbers
— because it's obviously not being kept under the pillow because it's paid into a
bank account. It’s then up to the consumers what they do with it over time.
The positive reading in this part of the report was in regards to long-term expansion… over
the course of the next five years consumers are actually pretty confident that they'll
see prosperity and economic growth.
So that definitely moved up higher over the course of the month’s reading. In terms
of short-term negative sentiment — this will probably persist throughout the remainder
of this year and hopefully we get out the other side, where consumer consumption starts
to pick up and sentiment starts to move in that way as well in that direction.
Let's move to business confidence — and the conditions there from the NAB survey in
August. So conditions… there was a reading of the
market there that was a 2.4 — to just being +1. So overall still some positive signs in
confidence, but it is a fall so that's not great. That was conditions — in terms of
confidence, that also fell by 3 points and we saw that as only a +1.
So the feedback, the message coming through in the business confidence and conditions
survey, is really just around two things … the trading conditions, and the global uncertainty.
On a positive note — housing lending. So we did see a reasonable bounce in the data.
Owner-occupier approvals up 4.2% in July — and that's the fastest growth rate since June
2015. Investor lending also spiked, increasing by 4.7% as a monthly increase. And the other
good news story here is really around the first home buyer. So the firsties are back
in the market in a reasonable way. The percentage of the market that they currently have now
is 19.6% — and that's at a seven and a half year high. So good to see the first home buyers
back in the marketplace trying to get their first home!
In terms of construction, there's definitely also been some positive numbers. In regards
to house and land — so we're going to start seeing some of that moving through, in terms
of construction jobs. But one of the biggest employers is really the medium and high-density
apartment market, and that's still struggling as we've well documented. The three problems
with this particular market here is the poor valuations for the people who did buy Off
The Plan — so some of them have been left with negative equity. That's on the back of
also some pretty ordinary construction and cladding issues around the quality of a construction
work. That's also now leading into financing any new projects that are coming through the
wings— and that’s going to be a bit of a problem I suspect into 2020, in terms of
the medium and high density apartment market. And this obviously is going to more broadly
affect the jobs growth in that particular sector and we might see some job declines
in the construction sector in that area.
In the past month, we also saw an update in regards to the Federal Budget — and really
some positive news here… we saw only a deficit of $0.7 billion — so very, very small deficit,
almost a balanced budget in the latest figures that have come out from Treasury. So that's
obviously a positive news story considering the same time last year we had a $10.1 billion
deficit. So this is where we are seeing a little bit of politics playing out in regards
to what's happening with economic activity. We are seeing the RBA calling on the Federal
Government to do more in regards to their fiscal policy because we've almost gone to
the bottom of the well with monetary policy, in terms of what the RBA can do to make money
cheaper to stimulate the economy. But this is the politics playing out. Because
I wanted to spend some time on this and, yes, politics does play a role in terms of our
economic prosperity and the Liberal Party are doing something here, which is really
all about the Liberal Party and that's disappointing, in regards to the broader economy. What I'm
talking about here is the politics that they're playing because we're only just past the election
and the Liberal Party has sworn to deliver the first surplus, which will give them greater
economic credentials to the voting public. So they are holding out in regards to announcing
any fiscal stimulus into the market until they deliver that surplus, which is probably
in surplus now. So what we're going to see is Treasury Frydenberg announce, I suspect
in the May budget next year, some stimulus that is going to flow into the economy.
My tip on that stimulus is going to be some further tax cuts and potentially moving some
of those tax cuts to happen earlier than what they are originally planned for.
Now, that is obviously great for people in the lower incomes because that pretty much
flows straight through to the economy. And the other big announcement we would expect
during that time is also that the Newstart will be increased when they announced their
budget numbers in the May budget. So, unfortunately, we're going to be holding out for that because
the Liberal Party want to score political points in regards to being the political party
that runs the economy better than the Labor Party. So the economy is going to suffer until
such time as a Liberal Party makes some decisions around that and because an election still
two years away they believe that they can hold out for that and get the economy moving
when it needs to, when it leads into the next election. So unfortunately that's the politics
of our economy at the moment. But that's my read in regards to what that looks like.
So, in summary, what is supporting the Australian economy really is the lower Australian dollar
— that's doing its job in terms of going down to record lows, which is great for our
exports and our miners and so forth; and they seem to be doing a bit of the heavy lifting
at the moment. Population growth is a real interesting story
here, and I just got some numbers on that. We've got around 370,000 people over the past
decade coming into Australia to call it their new home. Now, considering that the previous
decade this averaged around 217,000, there's no doubt that they are having a positive impact,
in terms of consumption and moving the economy. But we need to do more in regards to obviously
offering them jobs. And that's why the RBA have signaled that full employment is their
number one goal because that will also then correlate into some better inflation numbers,
which is obviously their mandate of full employment for those who want it and also an economy
that's growing 2 – 3% per annum in terms of the cycle. So I think the other positive
stories are going to come out of house prices are continuing to grow around the nation so
people will feel a little bit more calm talk about their spending, and low inflation and
state infrastructure spending is also going to be positive to support the economy
… so we're not going to be anywhere near a recession even though that is still talked
about in the daily news spread.
… we're not near that. The negative things, the headwinds that we're going to have, is
in is continuing the cautious and savvy consumer — they're obviously still you know keeping
their money in their pocket until they see better days. I also think, yes, the construction
slowdown — certainly in that commercial and also large residential building projects
— will have an impact in terms on our GDP numbers. So that will summarise the economy
as it currently stands.
So as I close out this week's announcement… … once again, it is a story of a 25 basis
points cut from the RBA cash rate — 0.75 of 1%.
What are the banks going to do? What will they pass on there?
Obviously, they banks have got a balancing act to play here. They have people who have
savings and that's going to impact them. So my view is that most of the banks will cut
between 15 and 20 basis points for this particular cut. If we see further cash rate declines
into the New Year, I suspect we might only see 10 basis to, maybe, 15 basis points if
there's another 25 basis points cut. So don't expect the full 25 basis points cut
— it's probably not going to come, but it's still going to make the mortgage burden a
little bit easier if it’s 15 or 20 basis points.
So it's over to the banks now… in terms of what they're going to do in regards to
that. So there it is! The RBA have made it very
clear this is what they're after — they're going after lower employment — they want
to see a four in front of unemployment — and they believe that that will then out the spare
capacity in the labour market and also over time start to see inflation starting to flow
back into the economy. Until next month, make sure you're looking
at your mortgage— make you've got a great deal and you're maximising it. Also, in the
property space, the marketplace is moving. So if you’re looking to get into the property
market, start doing more and more research around where you can find those best opportunities.
If it's owner-occupier, do your homework around the amenities in the area, and those types
of things, and the supply in the area. Investors; the same story applies — be a borderless
investor if you have to be in order to get the best opportunity over the short, medium
and longer-term.