Paul Bloxham is out again today with a new note which will bring cheer to the gloomy and yelps of joy to retailers. The Australian consumer is back, apparently, having concluded his/her eighteen months of disleveraging. Under the disconcerting title “It’s all part of the central bank’s game plan”, Bloxo declares:
In our view, rising saving in recent years had largely been a response to falling household wealth, most prominently in 2008/09 due to the global financial crisis, and later due to higher RBA rates in 2011, which suppressed housing prices. Households needed to rebuild this wealth by saving more of their incomes (and spending less). But this story of rising saving is now an old one. The period of rapidly rising household saving was between 2006 and 2009 – the saving rate rose 10ppts in that period.
Indeed, the household saving rate has been broadly steady for four years at around an average of 10%. The household debt to income ratio has been steady for six years. The period of considerable household balance sheet consolidation to replace lost wealth may be behind us. With interest rates low and household wealth rising, domestic consumption is expected to pick up.
There are early signs that this is happening, with retail sales rising in January and February and consumer sentiment around two-year highs in recent months.
Low rates, rising household wealth and a housing construction upturn are expected to support a pick-up in household consumption. We expect that the drag from household balance sheet consolidation and rising household saving may be behind us. Given the low level of household consumption as a share of GDP, there may be room for it to increase.
Joining Bloxo in this feel good outcome is UBS’ Scott Haslem:
Firstly, we think the RBA is likely to remain at a 3% cash rate trough for much longer than has normally been the case. It’s worth remembering that the RBA has not tended to spend much time at the low point of the cash rate cycle. Since the early 1990s, the average time between the RBA’s last rate cut and first rate hike has been 8-9 months, and in the past two cycles (2002 & 2009) the RBA only spent 5-6 months at its cash rate trough.
Last week, we further delayed our RBA cash rate call from Q114 to Q214; we now expect an 18 month period at the RBA’s cycle low, an unusually long period at the trough.
Secondly, even if the AUD grinds lower as we forecast, it is going to remain historically high. All other things equal, a central bank may balance a higher trend exchange with lower trend interest rates – to achieve a desired setting for overall ‘financial conditions’. Our financial conditions index (see Chart 4) suggests today’s setting is really almost ‘neutral’ when the record low cash rate is combined with the higher AUD. With the AUD likely staying high in the years ahead, the neutral RBA cash rate should be lower, and realistically could be circa 4–4¼% (not the 5½%-5¾%, as widely believed, in the past).
Thirdly, this suggests the RBA may have much less work to do on policy tightening over the coming 2-5 years than many other global central banks that are likely ‘several hundred’ basis points from their ‘neutral’ policy rates. This argues that Australia’s yields – currently 150bp above US Treasuries at the 10yr mark – should out-perform their global counterparts, and we see the Aussie-US 10yr spread likely compressing below 100bp over the next few years.
Fourthly, to the extent Australia’s government spending has grown in line with the receipts delivered by record high commodity prices, it suggests significant re-working of the budget (lower expenditure) will be needed to return the budget to structural surplus, amid a lower commodity price environment. This is unlikely to be evident in the upcoming May 14th 2013/14 federal budget.
Finally, a rebalancing China – with less commodity intensive growth of 7-8%, rather than 10-12% – may mean Australia transitions to a lower average interest rate (and lower AUD) environment than in recent times. If this is the case, the economy should be more able to experience its own rebalancing back toward more domestic-led GDP growth. Over the past few years, rapid mining-led growth has driven up the AUD and interest rates. A lower (but still historically high) AUD, together with lower average interest rates, should see growth rebalancing back toward the domestic economy.
The combination of lower rates and a gradual decline of the AUD ought to favour domestic interest rate sensitive and import competing sectors, such as retail, education, tourism, manufacturing (and moderately faster credit growth than has been the case in recent years). These sectors ought to enjoy a more constructive earnings environment in the coming few years.
And from the horse’s mouth, Luci Ellis of the RBA this afternoon:
The Reserve Bank of Australia has expressed renewed confidence that near-record low interest rates are spurring the property market.
“This recovery in dwelling prices makes sense, given how much affordability has improved as interest rates have declined,” said Luci Ellis, head of the Reserve Bank’s stability department, on Tuesday.
Ms Ellis said rising home prices, as well as a pick-up in loan approvals to investors and existing owners, confirm “monetary policy still works.”
“As so often seems to happen, soon after a period of easing we start to hear concerns that monetary policy might not have any effect this time, because of some special factor interfering with normal relationships,” she told a Citibank property conference.
“After a period though, the signs start to emerge.”
To summarise, everything is under the central bank’s control; deleveraging is over; China will enjoy a leisurely rebalancing and the Australian dollar a gentlemanly decline. Does that accord with your experience of how imbalances between countries are resolved? No?
Then perhaps you’ll prefer markets , which are now pricing two rate cuts in the year ahead with a trend clearly pointing towards more:
My trousers are very firmly in place today.
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