The Aussie economy is losing momentum
Happy new financial year!
Or is it?
Unfortunately, it appears the economy is losing momentum and there is a strong probability that the current financial year – 2018-19 – will be another one dogged by soft economic growth and no progress on lowering unemployment. It is also likely that inflation and wages growth will continue to track near record lows which means that for many, the economy will be a disappointment.
I hope I am wrong, but the economy looks to be on the edge of something quite disconcerting. There are worrying signs and the risk of slowdown in economic activity is very real.
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For most people a scenario of falling wealth, no real wages growth, bouts of underemployment and wafer thin savings, is problematic.
Consumers normally react to this cocktail of events in a rather obvious way. They scale back their spending, especially on discretionary items. This very action all but ensures a slump in retail spending and with it, further weakness in the overall economy. This time should be no different.
Just look at the economic news of the past few days.
The Corelogic measure of house prices fell in June and now has fallen for nine straight months. The previous surge in housing wealth based on rising house prices, which underscored confidence and spending, is just starting to reverse. At the same time, housing auction clearance rates have crashed as buyers withdraw from the market.
The ANZ measure of job advertisements fell a significant 1.7 per cent in June to lock in six months where the growth in demand for workers has stalled. This news fits with the recent official data on the labour market which shows a sharp slowing in employment growth.
Credit growth is also trending lower. For housing investment, growth in borrowing has dipped to a multi-decade low. Personal credit continues to fall – that is, credit growth is negative as consumers pay off their personal loans. Just wait until the tightening in lending rules that result from the banking Royal Commission start to bite.
Important also has been a downturn in the illion survey of business expectations as firms appear to be scaling back their outlook for sales, profits and selling prices. This leading indicator for the economy suggests weaker growth into the second half of 2018.
And most recently, the number building approvals fell 3.2 per cent in May after a 5.6 per cent fall in April. The number of building approvals in now 19.8 per cent lower than the November 2017 peak.
In all of this, the RBA Board meeting announced steady official interest rates. It refuses to react to the hard data on the economy, preferring instead to maintain a series of upbeat forecasts for the year ahead and it continues to keep monetary policy tighter than it need be because it perceives a risk of financial instability if rates are lower, even though there is no evidence to support this fear.
In three weeks time, the official inflation data will be released. These will be vitally important for considerations of interest rate settings with another low result leaving the door wide open for an interest rate cut.
Not that the RBA has, at the moment, any interest in lowering rates. It appears keen to leave interest rates at the current restrictive levels. But another low reading for inflation, in concert with any additional news showing widening cracks in the economy, will likely see it backflip towards an interest rate cut, perhaps before year end.