It’s time to get on my high horse again about the Australian economy and what is not being done by policy makers and the RBA. I live in the Hunter, having worked until recently as the Treasurer of the dominant Financial Institution in the region, in addition to spending countless hours, days and weeks getting to know and understand the local regional economy.
What I know from all this research is that there is no boom in the Hunter.
Now, if there is no boom in the Hunter, a region that replicates most of the occupational and economic diversity of the national Economy on average and still enjoys the significant kicker of a Coal mining and Shipping boom within its heartland, then why would we expect Mining to save the rest of the Australian economy?
This might sound like a narrow focus but by taking the regional and translating it to the National, my colleagues who write at Lighthouse Securities and MacroBusiness have consistently been able to get the actual tone and shape of the Australian economy right over the past few years in our private consulting and prognosticating and particularly in the last year or so in the blogshpere.
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But it seems the RBA and the Government have welded themselves to one of those big old coal trains that come down the Valley and exit through Kooragang Island to such an extent that they are extremely reluctant to see past the big ships, the big yellow machines and the big miners to the rest of the economy.
Now don’t get me wrong mining has a fantastic place in the Australian economy, an important place particularly here where I live and it is estimated that something like 60,000 people are part of the waterfall of employment that flows from mining.
But not all regions are as lucky as we are in the Hunter. There is no boom here so why would you expect the other 90% of the Australian economy that is not mining to be anything other than suffering under the weight of policy aimed at making way for mining?
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And so it is that in the last two days we have seen the release first of the NAB Monthly Business Index and then today the Westpac Melbourne Institute Consumer confidence index. They paint a picture of an economy that is slipping.
Yesterday I briefly mentioned the NAB monthly business survey for February showed that confidence fell in February. Adding to that fall. today Westpac and the Melbourne institute released their consumer confidence reading for March and it produced a similar outcome.
First of all lets take a closer look at the business confidence survey from the NAB. According to the NAB:
Businesses appeared less confident about near-term activity in February than in January. While overall confidence remained positive, uncertainty emanating from the euro-zone and financial markets, the persistent strength in the Australian dollar and the decision by the RBA to keep rates on hold in February may have weighed on the confidence of some sectors.
Business conditions improved a little in February, supported by a solid pick up in trading conditions and a slight rise in profitability, partly offset by a softening in employment conditions. Overall, while this month’s activity reading was slightly better, forward indicators of demand generally softened, suggesting near-term activity may continue to drift. Credit demand picked up solidly in the month, following particularly weak outcomes in the previous two months.
Conditions improved significantly in wholesale and transport & utilities in February, unwinding heavy falls in the previous month, while they deteriorated modestly in retail and mining. By state, conditions strengthened markedly in WA, while Victoria was the only state to report deterioration in conditions.
The key for me however is that the employment index, which is the best leading indicator of employment, fell a touch from 1 to zero and at that level indicates continued weakness in the employment market over the months ahead. This is consistent with what we are seeing in the performance of the economy, where the sector driving growth, mining, continues to employ a small fraction of the Australian workforce, while the non-mining economy remains under pressure, especially those linked to housing/retail or exports/manufacturing. The housing/retail sector as households deal with their large debt burden and the export/manufacturing sector which continues to be pressured by the high AUD.
Moving on to the consumer confidence report which showed consumer confidence fell by 5% from 101.1 in February to 96.1 in March and is now below the level it hit in October before the RBA started cutting rates. Bill Evans, the Chief Economist at Westpac had the following to say on the outcome:
Sensitivity to interest rates has clearly been one factor responsible for this weak print. The survey in February closed off before it was announced that banks were raising their mortgage rates despite the Reserve Bank having kept the official cash rate on hold. Recall that the survey in February covered the week of the Reserve Bank’s Board meeting. At the beginning of the week media reports had led respondents to confidently expect a 0.25%rate cut from the Reserve Bank
With the two previous rate cuts in November and December being passed on in full by the banks it is reasonable to assume that many borrowers expected a further cut in the mortgage rate of 0.25%. Instead, mortgage rates were actually increased in the following week with banks raising mortgage rates by an average of 0.10%. It is likely that this reversal has impacted confidence.
Petrol prices were also on the rise over the month and history tells us that there is a close correlation between rising petrol prices and falling confidence, especially confidence in family finances as rising petro prices have an immediate and significant impact on the family budget. Accordingly when combined with the clouded outlook for both the domestic and global economies, consumers preference for the deployment of their saving remains calibrated towards bank deposits and paying down debt.
They key however is that both business and consumer confidence, while gyrating from month to month, have been in a solid down trend for almost 2 years as seen in the chart below:
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I highlighted the Employment Index bit because it is always one of my key inputs into thinking about the economic prospects of the domestic and consumer economy so heavily burdened with debt. Just look at the recent Housing Finance figures and today’s dwelling starts which fell off a cliff.
I see an economy that is in strife. An economy that is becoming too heavily directed toward a reliance on China and all things Chinese and I see an economy that is having its manufacturing base, its tourism sector, its education sector and to some extent its retail sector hollowed out by the most obvious manifestation of the globes fascination with China – a high Australian Dollar.
The RBA is going to need to cut again, of that I have little doubt.
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But, don’t forget that this economic outlook may not, as is often not, going to directly influence the outlook for your investments. If the bullish breakout in the US markets is anything to go by and I am wrong to be leery then more positive equity price action is in the offing. Here is a good piece from my other best friends in the blogsphere Global Macro Monitor which takes a look on the moves overnight and makes some good and very valid points about the market at the moment.
Please remember these are not recommendations for you to trade these are my views and I have my risk management tools and risk parameters that you do not have access to. Thus, this blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives or financial situation
