Tuesday, August 11, 2015

Updating the Australian political and economic outlook

Today's post is just a round-up.

The latest opinion poll results suggest that the Abbott Government is still struggling to gain any political traction. The latest possible date for the next Federal election is 14 January 2017. That's actually not very long.

This graph from Wikipedia shows the rolling average pattern of two party preferred votes derived from the polls. It's quite hard to come back from this type of position.

One of the Government's difficulties, and this is an analytical rather than political comment, is that it's overall policy position has become so blurred that it's largely lost control of the policy and political agenda. I for one struggle to work out what might happen in policy terms because everything has become so messy.

On 7 August 2015, the Australian Reserve Bank released its latest statement on monetary policy. I rely quite heavily on the RBA analysis.I don't always agree, but it provides a starting point for my own thought. For those outside Australia, the RBA's international analysis is worth reading. It is, as you might expect, cautious and qualified, but always informative.

The first take home message is that global economic growth, while not brilliant, is actually not bad. Interestingly, the Eurozone is growing if slowly, with some of the peripheral states such as Spain and Ireland
making gains. Poor Greece. The actions of the Syriza government took Greece from incipient growth back into contraction. That's a JB, not RBA comment.. The BBC coverage is interesting, by the way. It's very English and London centric, far more than I had realised.  Economics editor Robert Preston is a case in point. This is his latest piece.

In the international analysis, I remain more cautious on China than the Reserve Bank. However, the passage of time means that potential Chinese contagion is less important than it was even twelve months ago. My feeling is that we will all muddle through.

A second take home message, and again this is my interpretation, is that the global economy has adapted better to the end of US quantitative easing than I had expected. I'm still unclear as to how all that cash sloshing around the global system will unwind. I think that the appreciation of the US dollar actually limits the freedom to raise interest official interest rates, but I have also come to the view that rises in global interest rates are closer than people realise. That will give the US Fed more freedom to move.

At Australian domestic level, the Australian dollar has depreciated against both the US dollar and the Trade Weighted Index. The TWI is a trade weighted basked made up of  the currencies of Australia's key trading partners. I think the RBA is quite comfortable here, with the lower Australian dollar now feeding though into increased economic activity. The inflation effects of higher import prices are starting to feed through, but are so far well contained.

Again at Australian domestic level, there were a number of other interesting features.

The first was the continuation of a two speed economy. Previously we had the mining areas versus the rest. Now we have the city states of Melbourne and especially Sydney versus the rest. The property boom is unsustainable. The end signals are already there. Population growth is down, we have over-building in apartments, while rents are lagging. Walking around the big apartment growth areas such as Sydney's Green Square with the cranes everywhere, I can only see future pain.

The second is that while the economy is effectively jogging along, there has been almost no increase in wages. Reduction in at least the growth in real wages is a normal outcome at the end of a boom. That is how the economy re-balances. However, the stagnation in real wages that we have now is a little unusual. This has political impacts.

Interest rates is the variable that I am watching most carefully at present. Chancing my arm, I expect Australian interest rates to rise over the next eighteen months. That is inevitable if my view of the economic outlook is correct.

Global interest rates are likely to shift up. If that happens, Australian interest rates will rise simply because of the country's dependence on overseas funding. Exports are likely to continue to grow in part because of the flow-on effects of mining investment, in part because of the impact of a lower Australian dollar. That will put upward pressure on the exchange rate, potentially easing the pressure on local interest rates. However, I do not expect that to totally offset the impact of the shifts in global rates.

 Timing is everything in these things. However, for those with Australian mortgages, I would run a sensitivity test to see where you might stand with a one or two percent increase in interest rates.        



Winton Bates said...

Hi Jim
I was a bit surprised that trading partner economic growth is around the long-run average. I thought it might be a lot worse.

Jim Belshaw said...

I will check that one, Winton. However, a few very general observations. I think that global growth is better than many realise. A lot of Australians don't realise how bad the GFC was because we got through it relatively unscathed. In a number of developed countries, per capita incomes are still below or only now getting back to pre-GSC levels. So trend or near trend growth still leaves a considerable gap. Then we have the effects of demographic change, with populations falling in some countries. So lower absolute growth in countries such as Germany or Japan delivers the same individual economic benefits. All very complicated!

Winton Bates said...

Jim, it looks as though the RBA's long run average might just cover the period since 2005. Even so, the slowdown in China doesn't seem to be having as large an impact as I thought it might.

Jim Belshaw said...

Hi Winton. Mmm. That's hardly a long term average. This actually bears on your productivity stats as well! China is still growing, just at a slower rate. From an Australian viewpoint it's the changing composition of that growth plus the supply side that's important. More broadly, if China switches it's focus from investment to consumption led growth, then that creates new global trade opportunities. The real risk with China has been, remains, a sharp drop in growth, the so-called hard landing. A slowing can be accommodated so long as the rest of the world is growing.

Winton Bates said...

I agree with all that, Jim. I think there are grounds for optimism that China will make the transition to an economy less dominated by investment in construction without too many problems, even though the government does seem to be showing signs recently of not knowing what it is doing (e.g. with recent interventions in the share market and exchange rates). They at least recognise they have a problem, which is more than can be said for the U.S. in 2007.

Scott Hastings said...

There are alarm bells in housing already. Rents have crashed in Ballarat, Bendigo and other regional centres, my brother is unable to find a tenant for an almost new home in Bendigo even at a 30% discount.

Jim Belshaw said...

Share market intervention strikes me as a bit crazy, Winton. That's interesting Scott. I don't know the Vic scene. How much are the Ballarat, Bendigo markets affected by flow-on from Melbourne?

Scott Hastings said...

Both centres have grown a lot in the past 5 years, with people fleeing high rents in Melbourne. This pipeline seems to have all but stopped in the past 6 months.

Jim Belshaw said...

Thanks, Scott. If Melbourne rental increases have slowed, vacancies increased, as seems to be the case from newspaper reports, then it would be logical to expect the pipeline to empty.

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