Let’s do a little roundup of today’s economic pet shop starting with some terrible analysis from Deloitte at the New Daily:
“Some downturns are big, and some are small,” said Geoff White, head of real estate at CoreLogic.
“Usually, it’s driven by economic conditions, but in this case it’s more about credit.
…During the GFC, banks were still prepared to approve loans, as the federal government’s bank guarantee – where the government underwrote the banks to boost confidence – kept credit flowing, while the first homebuyer grant stoked demand.
The tightening of lending standards – especially to property investors – coupled with increased stamp duty for foreign investors, have combined to cause the sharp market decline.
“We’ve had a GFC, we’ve had recessions and yet we’ve still seen the market rise,” Mr White said. “It will always dip and dive, and it depends on the severity.
“This time the economy, across Australia in most major centres, has been performing well. Unemployment is low, inflation is low, interest rates aren’t high. There are great periods of growth and there will be falls.”
…one commentator argues that economic conditions this time around should make homeowners feel more confident than they may have been during the GFC and the ’80s recession.
Not only is the economy strong enough to weather the storm, but Deloitte partner Nicki Hutley told The New Daily their analysis shows that wages are going up “albeit slowly” and people are still spending.
“When people say it’s the biggest downturn, it was preceded by the biggest upturn.
“In Sydney, for instance, we had houses going up 75 per cent, so for the bulk of people who brought in last five years they’re still ahead of the game,” she said.
Ms Hutley stresses that the drop-off in investor lending is nowhere near the extent of what happened around the GFC and that “things are going in our favour”.
“The biggest risk to Australia is not internal but external – China is the biggest risk at the moment, but even there the government is acting to bolster the economy through fiscal stimulus.
“I’m far less worried about internal [circumstances]. We’ve got good employment rates, there’s income growth, it’s slow but it’s growing and that helps consumption. Thing are going in our favour.”
Similar poor analysis is available from Jess Irvine today.
I hate to break up the love-in but Australia’s external accounts are booming. Our problems are ALL internal. This simple truth is illustrated by relative PMIs. Everywhere outside of Australia is seeing an export-led industrial slump in growth with domestic activity in services holding up well:
But Australia has the opposite. Both export volumes and income are trending higher, industry is OK, while domestic services activity plunges:
It’s house prices, stupid. They are dragging down consumption and construction. If there is no intervention to stabilise the market then Australia will crash into recession in H2 this year while our Chinese connection is booming.
That has others arguing that all will be fine with a helping hand from gubmint, via Bloomie:
…The government has legislated some income-tax cuts and said in its mid-year fiscal and economic outlook it has about 0.5 percent of GDP penciled in for “decisions taken but not yet announced” — widely regarded as a nod to further giveaways.
Michael Blythe, chief economist at Commonwealth Bank of Australia, expects the RBA to keep standing pat and says the government should step in.
Similar is argued by Industry Super economist Stephen Anthony at the AFR:
Mr Anthony said the Reserve Bank of Australia should “sit on its hands”.
“I don’t want to hand out an opportunity of largesse to politicians who will take any opportunity to spend, but it is time to bring out the fiscal cannon,” he said.
That is waiting too long given the nature of the risks is far more serious than any garden variety downturn. We’re toying with a balance sheet recession here. If allowed to run the pain will be epic.
As well, tax cuts are not going to work while wealth shrinks. The windfall will be saved. If fiscal is required, and it is, then it should be cash giveaways and investment. Aside from anything else, recycling a temporary commodity surge as permanent tax cuts is bloody stupid. Sadly, I suspect that is exactly what Recessionberg will give us, booby trapping the Budget for Labor, and delaying the much needed direct fiscal support.
Shifting to monetary policy, Chris Joye is his usual hawkish self:
If the RBA bequeathed the bubble, it was APRA who saved us by deflating it in an orderly fashion with an unprecedented series of constraints on new credit creation and a unilateral tightening of lending standards that compelled banks to hike rates on investment and interest-only loans by between 25 and 50 basis points.
Acknowledging these insights is important in the context of the feverish speculation that the RBA will get the yips from its long-held position that the next move in rates is up. There is a consensus that the RBA will once again debase the price of money as a result of declining house prices putting downward pressure on consumption and growth even though Australia’s jobless rate is at a historically low 5.0 per cent level that the RBA has stated is consistent with full employment.
A more sensible central bank might be concerned that its standard minimum move of two 25 basis point cuts would be capitalised right back into house prices, with Saunders and Tulip’s analysis implying home values will jump 14 per cent (more than negating the peak-to-trough losses recorded in the current correction).
Come on, mate. That was 325bps of cuts. It was before we had Chinese capital flight, rising funding costs (and yes, they are still rising in moving average terms), HEM reform, MP3.0, interest-only reset, no more negative gearing, oversupply etc, etc, etc. When we get our 100bps of cuts they’ll be half kept by banks for a total of 50bps mortgage easing and the impact on sentiment will be marginal. The main impact will be on the currency (as we’ve already seen).
Sally Auld at JPM finally bought some sense to the debate, also via Bloomie:
“At some point Lowe will sit there and say to himself: do I really want to be the guy, in six months’ time, where everyone points the finger at me and says, ‘you sat there and did nothing when blind Freddy could’ve told you that things are going south,”’ she said. “He doesn’t want to be that person”.
Why not? It’s a crowd!
David Llewellyn-Smith is chief strategist at the MB Fund and MB Super which is long international equities and local bonds that will benefit from a weakening Australian economy and dollar so he is definitely talking his book.
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