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We’re on a roll
By Peter Switzer
On my Sky News Business TV programme this week, one of Perpetual’s most respected number crunchers, Matt Sherwood, reinforced my pretty positive views on the Oz economy by suggesting that by year’s end we’ll be chugging along at a 3% economic growth rate.
Pay rises kick in
This is the kind of growth that will create jobs and start putting pressure on employers to start giving bigger pay rises. When that happens, we’ll be heading towards better economic and stock market times.
My sparring mates
It also has been nice to have both the Reserve Bank and, for that matter, Treasury agreeing with my favourable forecasts for the economy, though I’m more comfortable when I’m slightly at odds with these two august institutions.
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Nice one on jobs
On Thursday, we got another nice jobs report that keeps me believing in my economic prognostications, with CommSec’s chief economist, Craig James, telling us that: “Employment rose for the 10th straight month, up by 27,900 in July after rising by 20,000 in June (previously reported as a rise of 14,000 jobs). Full-time jobs fell by 20,300, while part-time jobs rose by 48,200. Economists had tipped a 20,000 increase in jobs.”
Two ripper months
This follows two ripper months for full-time jobs, which lifted by 115,400 positions in May and June, which was the strongest back-to-back job gain in 29 years! In 2015, the jobless rate was 6.3% and experts said it was going higher but they were wrong. It’s now 5.6%.
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Switzer-v-Reserve Bank
Regular readers might recall that a few years back I had regular battles with our central bank with its stubborn refusal not to cut interest rates, when my eco-checks were screaming out, at least to me and a few others, that we needed to lower interest rates or we’d end up in a recession.
Rates to rise, but when?
They finally got the message and here we are at 1.5% — an historical low for the official cash rate. However, now I want to see the economy improve sufficiently to see the first rate rise, but I can’t see that happening this year.
My bet is it will be in 2018 and will be determined by how quickly the economy can get towards 3% growth, inflation beats 2% convincingly and wage rises start to happen.
2019: the year of the rate rise?
Some credible economists think it will be in 2019 but I hope and suspect they’re being too negative. My money is on a mid-2018 rate rise. Of course, the quicker we grow, the faster the first rate rise will come along.
This week we saw the latest wage stats and the wage price index rose by 0.5% in the June quarter, to be up 1.9% over the year. Annual underlying inflation remains below wages at 1.7%, so real wages are higher but the size of the rise is still too small.
Will I be on the money?
So how likely is my optimistic outcome for the economy? My latest eco-check of the facts that many experts choose to ignore is keeping me long on self-belief!
Have a look at the latest run of data:
Job ads rose for the fifth straight month, up by 1.5% in July to 177,879 ads – a near 6½-year high. Job ads are up 12.8% on a year ago.
The CoreLogic Home Value Index of capital city home prices rose by 1.5% in July and was up 10.5% over the year. This is a hassle for regulators but it says homebuyer confidence isn’t waning.
The Commonwealth Bank Manufacturing Purchasing Managers’ Index fell by 1.8 points to 54.4 in July, but a reading above 50 indicates that the sector is expanding. The expansion rate has slowed but the sector is still growing.
Two weeks ago, the ANZ/Roy Morgan consumer confidence rating rose by 3.3 points (2.9%) to a 5-month high of 118.4 in the week to July 30. Respondents’ views on economic conditions over the next 12 months rose to a near 4-year high! Consumers have been an important negative for the economic outlook and this rebound in confidence is good but not yet a trend.
Private sector credit rose by 0.6% in June, after a 0.4% rise in May. Annual credit growth rose further from recent 3-year lows, up from 5% to 5.4%. Recall that regulators are trying to slow down lending to investors and those buying expensive properties using interest only loans.
In trend terms, loans for alterations and additions of homes (renovations) hit 7-year highs but personal loans hit a 14½-year low in May, while annual lending to buy land hit record highs.
Business credit rose by 0.9% in June to be 4.4% higher than a year ago, which is a good sign for business investment, which has been lagging of late.
Approvals by local councils to build new homes rose by 10.9% in June, after falling by 5.4% in May. House approvals rose 4% to 13-month highs and the doomsday merchants want us to believe that housing construction is set to nosedive! I expect it to slow down but not collapse, as pessimists want to believe.
The above good news slightly counters this bad news that dwelling starts (commencements) fell by 11.4 % in the March quarter. House starts fell by 7.7% and apartments fell by 15.1%. (You have to be careful of monthly figures.)
In May, there were 706 million purchases made with credit and debit cards, up 16.3% on the year and a result just exceeded by the Christmas sales in December last year. The purchases amounted to almost $51 billion, up 11% over the year.
Retail sales rose by 0.3% in June, to be up 3.8% over the year. Non-food retailing rose by 0.5% in June. Non-food retailing has risen by 2.4% in the past three months and is up 3.8% on a year ago.
New motor vehicle sales totalled 92,754 in July, up 1.6% on a year ago and a record for the July month.
The rolling 12-month trade surplus rose from $8.9 billion to $12.7 billion, which is the biggest surplus in five years, so the export sector looks to be contributing to economic growth, though that damn rising Aussie dollar is taking away some gloss from our better trade surpluses and better terms of trade.
Export prices for meat and meat products rose 7.2% in the quarter to record highs.
A record 8.94 million people travelled on the Sydney-Melbourne air route over the year to May. The load factor hit a record high of 83.8%.
For those worried about China as our most important trading partner, well, look at this: “The Chinese economy grew at a 6.9% annual pace in the June quarter, above forecasts (+6.8%). The economy grew by 1.7% in the June quarter, up from 1.3% in the March quarter and in line with the forecast estimate of 1.7%. Pessimists had their growth number as a 5% something by now!
A record 1,519,100 tourists came to Australia from Greater China (China and Hong Kong), up 11.3% over the year. And US tourist numbers continue to soar, up 15.7% over the past year to 750,200 visitors.
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My favourite numbers
This is my favourite set of numbers and really gives me hope that we’re getting close to a turning point for the economy, with the NAB business conditions index rising from +10.9 points to a 9½-year high of +15.1 points in June. The business confidence index rose from +7.5 points to +9.3 points. And the measure for business conditions (i.e. what business is saying now) is at a nine and a half year high and business confidence is up on a rising trend. At +9.3, it’s way above its long-term average of +5.8! Check this out:
The two negatives
The negatives now are the slow pace of wage rises and that damn Aussie dollar, which we need to see fall to the lower 70 US cents region. If the US economy keeps producing solid numbers, such as its latest jobs report where 209,000 jobs showed up in July against a forecast of 183,000, and the unemployment rate fell from 4.4% to 4.3%, then the greenback will go up and our dollar will fall.
So much to be positive about
As you can see, there are plenty of reasons why you can at least be cautiously optimistic about our economic future and the date convinces we are going up, baby, up!
Peter Switzer is the founder of the Switzer Super Report, a newsletter and website for self-managed super funds.
