Via Domainfax:
Deloitte Access Economics’ quarterly business outlook, released today, predicts the official cash rate of 1.5 per cent will climb slowly in 2018 and 2019 to reach 3 per cent in the early 2020s.
The Reserve Bank was well aware “interest rates are now a massively more potent weapon for slowing the Australian economy than they’ve ever been before”, the forecaster said.
It noted Australian families have overtaken the Danish in recent months to become the world’s second most indebted households after the Swiss, relative to income – a consequence of “dangerously dumb” house prices.
Director Chris Richardson told Fairfax Media a crisis could be averted if, as he predicted, interest rates rose slowly and steadily. But cheap credit and high leverage still posed risks.
“In global terms our housing prices are asking for trouble,” Mr Richardson said, arguing many workers have found their homes make more money each day than they do. “That’s kind of God’s way of saying: this thing’s gonna blow.”
Sydneysiders were particularly vulnerable, Deloitte found, having benefited enormously from low interest rates but now witnessing “silly prices” that continued to grow – a “rather worrying development” in Deloitte’s eyes.“The seeds of future slowdown are already well and truly sown. The better that NSW looks now, the greater the troubles that this state is storing up for the future,” the outlook warned.
“The joy of rising wealth eventually gives way to the pain of servicing gargantuan mortgages. Interest rates are beginning to rise around the world and although official interest rates in Australia may not follow suit until 2018, that augurs badly for the disposable incomes of Sydneysiders.”
If you look at the Deloitte outlook it’s obvious that this is not going to happen:
It may have seemed a tad brave when we greeted 2017 with the view that this year would see global growth outperforming – and Australian growth too. But that’s now fast becoming accepted wisdom. The green shoots are everywhere. China has been throwing the kitchen sink at its economy, India is looking as if it will shrug off the cash crunch of recent months, while New Zealand looking pretty comfortable too. And we think that US growth will begin to be supported by growth in business spending, while both Germany and Japan are at full employment. All in all, that’s a pretty good business backdrop for the globe in 2017. And conditions thereafter look solid enough too.
There’s a lot going right in Australia too. China is delivering us a surge in national income the likes of which hasn’t been seen since the height of the resources boom. That has ended the so-called ‘income recession’ that’s been weighing on Australian wallets and purses since late 2011 – and not with a whimper, but with a bang. Even better, China’s largesse arrived at the same time as new mines and gasfields – commissioned during the glory years of the resources boom – hit their straps. That has meant not merely better prices for what we sell to the world, but also increased quantities of those sales as well. And at the same time that the world has gone back to throwing money at Australia, the Reserve Bank did the same with its two interest rate cuts in 2016. Not surprisingly, that pumped up this nation’s already overly botoxed housing prices, with a resultant spectacular lift in wealth. The 9.23 million Australian households had net worth of $9.40 trillion as at end-2016, meaning that
Christmas 2016 saw the average Aussie family become millionaires.
Yes, you read that right. Thanks Santa. But wait, there’s more: last winter’s rains were good, and prices aren’t bad either. Even allowing for Cyclone Debbie, that still makes this the best year down on the farm in a number of years. And State Governments are spending on new roads too, while better news on company profits is giving the Federal Budget a bit of breathing room for the first time in ages, while housing prices have added lustre to the budgets of east coast States.
Inflation remains flat as a tack. And why wouldn’t it, with the largest component of prices – wages – travelling at record low rates. But the first breath of a turnaround may be stirring, with hints of price pressures starting to be evident globally, and with the strength of commodity prices around the world suggesting that the lows for wage growth may soon be in sight in Australia. Any pick-up in either inflation or in wage gains is, however, likely to be both modest and slow.
Interest rates have been so low for so long that cheap credit seems normal. But global markets are pricing in more inflation and growth, and coming years will see rising interest rates. We don’t see Australian rates starting to rise until 2018 – but rise they will. Housing prices are dangerously dumb, and the Reserve Bank won’t want to add further fuel to that fire. With a very forgiving global backdrop, the $A may remain near its current levels through 2017.
Rubbish. The terms of trade shock to the downside has already resumed and will be enormous by year end. The income shock will resume with it, wages take more pain, the Budget be shredded again and pressure will pile up on the RBA to cut rates further.
The bubble is going to blow but not via the RBA hiking rates.
