Boom boom brake

Published in the Herald Sun, March 2015 by Paul Gilder

Three months into the year, the economy is fighting for traction as the good times fade, writes Paul Gilder

Just in case you missed it, the Reserve Bank board sent us all a postcard on their Christmas holidays, which, in typical fashion, arrived days after they got back to work.

Figuratively, of course, the RBA “got back to work” on February 3 at their first monetary policy meeting for the year.

Immediately trimming the official interest rate by 0.25 percentage points to a historic low, the board members left economists in no doubt as to how their view of the world had changed while working on their tans.

The “postcard” lobbed into our collective letterboxes three days later, with glossy Pilbara iron ore trucks pictured on the front and the wistful phrase, “wish we were here”.

The “here” in this instance is the resources boom, when iron ore and coal miners seemingly had a licence to print money, China was willing to pay handsomely for the stuff and the threat of a recession was pure fantasy.

Last month’s quarterly statement on monetary policy laid bare the RBA’s reasoning behind its new-found bias towards cutting rates: Australia was being dragged kicking and screaming into the global growth wilderness.

So here we are. The RBA has pared back its short-term growth expectations, but notably not its long-term ones — crudely, it still expects Australia’s ship to come in, just a little later.

Plenty of stimulatory factors are helping the board stay positive. China has slowed down but is talking a still upbeat story of 7 per cent economic growth this year.

The US is putting on workers and its economy is reawakening. Europe has turned on the printing presses.

The Australian dollar has played its part in assisting local exporters, slipping 7 per cent this year before finding some support as the US Federal Reserve reiterated its softly softly approach to rate rises.

On the flip side, high unemployment is a nagging issue, while business and consumer confidence is still recovering from last year’s Budget and lower inflation is capping wage growth.

IG Markets strategist Chris Weston says that of the nations possessing the world’s most heavily traded and liquid currencies, Australia remains “the great unknown”.

“I struggle to see the Government doing anything to help restore confidence levels,” he says.

“Once again, as it is in many major economies around the world, it’s all down to the central bank to do the heavy lifting in the Australian economy.”

So here we are.

Although Australia is in its 24th straight year without a recession — loosely defined as back-to-back quarters of negative growth — the dreaded “r” word cannot be so easily dismissed anymore, Mr Weston says.

“We’re not doing anything sensational and the risks are to the downside with China slowing down. I don’t see an all-out collapse but a recession remains a slim possibility.”

Mr Weston says the US appears on track to notch up growth in gross domestic product of 3 per cent to 3.5 per cent, on an annualised basis, in the June quarter.

There are also more positive signs emerging in Europe, he says, after the European Central Bank launched a €1 trillion ($1.4 trillion) quantitative easing — or monetary stimulus — program in recent months.

The concern is that a deflationary spiral offshore — where falling prices lead to lower production and wage levels, reducing consumer demand and sparking price falls — could affect sentiment at home.

That appears most prevalent in Europe, argues CMC Markets chief market strategist Michael McCarthy, where quantitative easing runs the risk of letting politicians “off the hook” on structural reforms.

“In the long-term, QE is damaging,” Mr McCarthy says.

“It’s giving fiscal policymakers a chance to step away from their responsibilities. They may need a crisis in Europe before they take this seriously.”

Mr Weston says Fed chairwoman Janet Yellen deserves plenty of credit for last week removing its reference to remaining “patient” on the timing of rate rises without spooking equity markets.

Indeed, America’s benchmark Dow Jones Industrial Average climbed 300 points immediately after the Fed’s policy meeting.

And on the currency front, the greenback — which at its elevated level adversely affects demand for US goods and acts like a quasi-rate rise — fell four euro cents.

Back home, the green shoots of a business earnings recovery are slowly starting to emerge, according to George Boubouras, the chief investment officer at Contango Asset Management.

“The sharemarket is rising on the expected recovery in earnings in 2016-17,” Mr Boubouras says.

That’s because lower rates, and lower rates for longer, persist while the low Australian dollar in tandem will help cushion corporate Australia through the transition away from mining.”

Local businesses are being cautious with funds, he says.

Apart from a few pockets of spending recovery, consumers appear content to save money or pay down their mortgages.

Investors have enjoyed a golden run on the market so far this year, which is up nearly 10 per cent.

The prospect of cheaper credit for longer is driving the search for high-yielding stocks, or those that offer a stable and consistent dividend.

Think the likes of mum-and- dad favourites the Commonwealth Bank, which is up 10 per cent this year, and Telstra, up nearly 7 per cent.

But CMC Markets’ Mr McCarthy says that at current valuations, the market looks stretched and this latest spurt had been built on easy money, not the expectation of future company earnings.

Even the CBA, on the verge of pushing through the $100- a-share mark, faces a challenge to sustain its momentum, he says. “The growth in the banking system over the past year was about 3 per cent.

This year, their ability to wring out more value from reducing bad debts and boosting their loanbooks will be tested.”

For homeowners, the lower interest rates rates are easing the strain on debts, provided the income side of the ledger is looked after, AMP Capital chief economist Shane Oliver says.

“If you’ve got a job and you’ve got a mortgage it’s a good environment to be in. If you don’t, it’s not so great.”

Dr Oliver says this month’s Intergenerational Report, which paints a bleak scenario of Australia’s ability to financially support a greying population, highlights the need for longer-term policies to gain bipartisan agreement.

“Since the mining boom, successive governments have spent a lot of those proceeds, some through tax cuts or simply increased expenditure,” he says.

“The boom is well and truly gone, but spending is still in vogue. For the coming Budget, businesses would probably like to see a bit more of a confident message that the Federal Government is bringing the Budget under control, but there’s a limit to how much they can do.”

Dr Oliver says one of Canberra’s major initiatives to encourage infrastructure investment, the $5 billion asset recycling scheme, has the support of the NSW Liberal Government, which is set to receive $2 billion from the
scheme for leasing 49 per cent of its electricity assets.

Those funds will then be siphoned into extensive road and rail projects, although with the Labor Opposition campaigning against electricity privatisation, a change of government at today’s state election may yet see the asset recycling offer revoked, he says.

Of course if all else fails, it might be time to consider taking a holiday — we’ll expect a postcard.

Shares

Australian shares rocketed ahead this quarter and are on track to finish with the best quarterly performance in more than 10 years.

By comparison, the sharemarket increased 1 per cent in the same quarter last year.

According to fund manager Wealth Within most of the recent gains are about the market catching up after a stagnant 2014, where shares barely finished 1 per cent higher for the year.

To date for 2015, Aussie share prices are being led by a rise in good quality stocks, Wealth Within analyst Janine Cox said.

Not all international sharemarkets have had such a strong run. The S&P500 was flat for the quarter, suggesting that the US market is slowing, Ms Cox said.

At home, the financial sector has risen 13 per cent since January, followed by consumer discretionaries, up 12.7 per cent.

Superannuation

It has been a strong quarter for superannuation fund members, with expectations the average balanced fund will show a 5 per cent profit for the March quarter.

Super funds were on track to be even higher, after outperforming in January and February, but subdued sharemarkets during March look set to contain the final return to about 5 per cent.

According to independent research company SuperRatings the return for the financial year to date is sitting at about 10.5 per cent.

SuperRatings research manager Kirby Rappell said reasonable returns from both listed and some unlisted assets have contributed to the healthy quarterly result.

Low interest rates and the falling Australian dollar have provided a boost to company growth and export returns, which have been reflected in share prices.

However, the longer term outlook still remains uncertain.

Property

Despite a slow start to the property market this year, industry estimates say it is on track for a 2 per cent increase in prices for the March quarter.

Final numbers for March, not due until next week, are expected to add to the 1.6 per cent confirmed growth during the first two months of the year, taking total gains of more than 2 per cent.

According to RP Data, the March performance may show a slightly bigger uptick than previous months, as February’s interest rate cut takes effect.

Capital city markets are showing a wide variation.

So far this quarter, Melbourne has led with a combined 2.9 per cent gain, followed by Sydney at 2.8 per cent.

Brisbane, Adelaide, Perth and Darwin all recorded falls.

However, RP Data said annual trend figures offered a better insight, with the rolling 12-month price increase in the capitals at about 8.3 per cent.

Cash

SAVERS dipped out this quarter, with the average six month term deposit interest rate down by just more than a quarter of a percentage point.

That was slightly more than the 0.25 per cent official rate cut by the Reserve Bank in February.

The average interest paid to savers for a $50,000 term deposit fell from 3.27 per cent at the beginning of January to just 3.1 per cent this week, according to financial research company finder.com.au.

It was better news for borrowers, with mortgage rates for both fixed and variable rates falling.

The average variable mortgage rate fell in line with the official rate cut, from 5.35 per cent to 5.1 per cent during the quarter.

Fixed rates remained higher, finder.com.au spokeswoman Michelle Hutchison said.

The average three-year fixed mortgage rate has fallen just 0.1 basis points to 4.91 per cent since January, she said.