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11 things you need to know about interest rates
Economists’ views on our economy are so wildly out of whack or consensus that it really isn’t easy to be confident about our economic future.
I’ve never seen economists so split on where the Oz economy is heading and some of my mates will have egg on their face, with one really smart guy tipping the first rate rise will be early in 2018, while another smartie thinks it will happen at the end of, wait for it, 2019!
Rates up or down?
This week on my Sky Business TV show, Paul Bloxham, the chief economist at HSBC here in Australia, thinks growth will get up to around 3.3% by the year’s end and the first rate rise will be in the first quarter. In contrast, Paul Dales, the chief economist at Capital Economics has growth more in the 2.5% region and the first rate rise at the end of 2019!
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Two years before a rate rise?
Paul is saying our economic story will be OK but so subdued that the RBA won’t touch rates for two whole years, which sounds incredible. And even though I like the idea of rates being lower for longer, the other implications of his big call worry me.
And what about our dollar?
If Paul is right and we’re growing nicely, then our dollar will be lower as the USA raises interest rates fairly briskly, starting in December, and pumping them up over 2018. If his growth calls are right, then jobs are being created, profits are on the rise and wages will be starting to pick up after years of too low increases that have undermined consumer confidence.
Who’s right or wrong?
On the other hand, Paul Dales has a less heartening snapshot of 2018. And because he can’t see where the better growth comes from, he thinks the progressing back to what looks like a normal economy in Bloxham’s story, will take longer.
I hope Dales is wrong, as it doesn’t augur well for profits and share prices and implies we’ll be stuck with this underwhelming stock market, which is more than 1000 points from its all-time high and which happened just before the GFC stock market crash in late 2007.
How are the Yanks doing?
Meanwhile, the Yanks are again in record territory for the Dow Jones Index and the S&P 500. If Dales ends up being right, then we might never get above 6828.70, which was our all-time high on the S&P/ASX 200 Index.
When will the stock market get a lift?
History says we always beat the previous high on this index and then go higher before another crash happens. However, if Dales is right, then it will take about three years before we get into record territory, or we might defy history and not get there before the next crash! I don’t want to believe that, so I’m in the Paul Bloxham fan club for now.
When will the Yanks raise rates?
Helping us is the world view and the US central bank — the Fed — which overnight was a little more hawkish than many expected. In market parlance that means it’s more likely that the Yanks will see another rate rise in December, and then more of them across 2018 as the Fed begins rolling off its $4.5 trillion balance sheet in October, most of which consists of Treasury bonds and mortgage-backed securities.
For normal people that means the US central bank will be selling these securities back to big bond players. It therefore means less money in the US economy, and rates will rise.
More importantly, it’s a sign of confidence in the USA and talks more to Bloxham’s optimism.
How’s the rest of the world going?
And it comes as the Fairfax press today tells us that “The global economy has reached a turning point,” according to the Reserve Bank, and it came “on the same day as the OECD lifted its forecast for global growth thanks to a coordinated economic recovery.”
This is good news for us as a country that sells exports to an improving world economy, but typical of most economic bodies, the OECD is warning that our first rate rise could create a “sharp correction”!
But this comes as the pointy heads at the OECD in Paris say global GDP growth is projected to increase to around 3.5% in 2017 and 3.7% in 2018. Last year’s number was 3%, so this is a good story for Bloxham and the optimists.
A rate rise in mid 2018?
And over the course of this week, both the ANZ and NAB economics teams got closer to Bloxham, with new forecasts pointing to a mid-2018 rate rise, which implies they see an improving outlook for the Oz economy.
If the US and world economic outlooks were on the slide, I’d be a Dales supporter but I think Paul Bloxham has a good chance to be on the money and especially so if Donald Trump can get his tax plan through Congress by year’s end.
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Donald, where’s your tax plan?
A CNBC survey of market smart experts found that a tax plan will be up by the first quarter of 2018. Only 2% think it will never happen. That’s in contrast to healthcare reform, where 39% think it will never happen!
Stock market up, rates up?
Right now, just about every fund manager I’ve talked to thinks we’ll beat 6000 on the ASX 200 Index by mid-2018 and then tackle 6800 by the end of next year. If these guys are right, interest rates will be on the rise. I never thought I’d write this but I’m praying for a rate rise next year and I think my prayers will be answered, even with the OECD’s alarmist prediction, which should be proved wrong, like many of their predictions about us!
The downside of low rates
Historically low interest rates are a symptom of the GFC and the Great Depression that was threatening, so the quicker we get back to a more normal economy with normal interest rates the better. But more importantly, the economies of the world have to be ready for it. That’s why Janet Yellen — the US central bank boss — told the world this week that she wanted to sell back the bonds the Fed bought from financial institutions when it wanted to put a heap of money into the US economy during the GFC to kill off any chance of a Great Depression.
Heading in the right direction
We are heading in the right direction economically-speaking, here and overseas, but economists aren’t sure about how fast we’re travelling.
Peter Switzer is the founder of the Switzer Super Report, a newsletter and website for self-managed super funds.
