Despite my tag-line explicitly mentioning finance I haven’t really been harping on the subject much recently. I’ve always managed to find something else far more interesting than boring everyone to death with dollar figures or the latest news on how the Global Financial Crisis is unravelling itself. More importantly however the big ticket financial issues haven’t really caused any waves and as such I really haven’t had anything to say on the matter. Yesterday however a juicy little nugget in the form of recent GDP growth has given me a little something to talk about:
The economy grew 2.7 percent from a year earlier, the report showed. Economists forecast a 2.4 percent expansion.
Signs that Australia’s economy outperformed other nations made its dollar the best performer among the most-traded currencies in the past year. The currency has climbed 42 percent versus its U.S. counterpart since March 2009 and this week hit a 25-year high against Britain’s pound.
Faster-than-anticipated growth was a key reason policy makers increased the overnight cash rate target to 4 percent yesterday from 3.75 percent and prompted Governor Stevens to say rates should be closer to “average,” which he last week signaled may be 75 basis points higher than they are now.
It was just under a year ago when I did my first analysis of how Australia was reacting to the GFC and I did a followup a few months later. Back then I made the point that Australia was well placed to whether the fallout from the USA’s failings and we would for the most part be unaffected. Here we are many months along the track and my predictions have come true, despite the air of skepticism that abounded in the media and amongst my peers. I can’t say that I blame them though as the media was pushing the story that everyone wanted to hear and the everyman would have to actively seek out the opposing viewpoints, something which most of them don’t have the time or resources to do.
The follow on effect of economic growth is of course higher interest rates. Whilst I appreciated them at the time (and managed to lock in a home loan at an absolutely ridiculous rate for the next 2 years) I feel there might be a mini housing crisis on the horizon when the interest rates ramp up and flood of first time home owners start to feel the pinch. The First Home Owner’s Grant boost definitely kept the low to mid range of the property market from feeling any effects of the GFC however it may have come at the cost of long term price stability in the future. I’m really just speculating here as if interest rates stay away from their 2008~2009 highs then most of them will be fine. However I know many who took advantage of the boost to crack into the property market without thinking about the long term consequences, especially when concerning higher interest rates. Time will tell if this mini-disaster comes to pass (it will be short, as the glut of cheap homes will be snapped up by investors) but I’ll be watching the low to mid range market carefully over the next few years.
Another factor to take into consideration is the current unemployment rate, which has shown an interesting turn recently:
I made the observation back in September that the unemployment rate was steady to that month, which was a good sign. However in the same breath I also cautioned about another metric, underemployment, that showed there was still some work to be done. Recent figures show that in fact things are improving with the underemployment rate dropping 0.4% to 13.5% a small but marked improvement. The article I just linked echoes the feelings I was trying to get across many months ago but also fails to recognise that underemployment and unemployment will track each other quite closely, with minimal lag between changes. The stability of the previous 2 quarters plus the trend down in the quarter just past shows that not only are we creating more jobs but we’re also able to ramp people back up that had to cut back their hours for economic reasons. Both these metrics are trending in the direction that you’d expect when the economy is on the way up, which for all intents and purposes it is.
Additionally the mass media has been generally free of any major doom and gloom stories regarding the economy. The last interest rate hike went past without even a second glance from the major news outlets when just under a year ago it would’ve spurred days worth of debate. It seems that we’re far more interested in Rudd’s latest health care plan than whether or not our houses are going to be worthless and our mortgages untenable, which means the consumer sentiment is improving.
After spending the past year telling everyone that it wasn’t going to be as bad as the news made it out to be it’s good to finally get some vindication on the matter. This year will see Australia drive itself forward and will hopefully let the Rudd government start to really get their teeth into some real initiatives, rather than fighting an economic fire. With an election not far off it’s going to be interesting to see not only how the post GFC Rudd handles himself, but also Australia at large.
With the ABS releasing its National Accounts figures yesterday a strange thing occurred, we avoided a recession. In a seemingly unprecedented move the Australian economy rose above negative territory and showed a small positive growth of 0.4%. The results of this news was almost instantaneous with the share market closing slightly higher overall. Whilst I’m cautious about this signalling the end of the bad economic times for Australia (and I’m glad Rudd doesn’t think that either) it does show that as a country we are well placed to ride out this crisis with the least amount of impact to our daily lives. There are a few key points to take away from the ABS’ figures however.
Firstly we need to take a look at what the contributions to the GDP figure where¹:
What we can see here is growth in Agriculture, Mining, Energy, Construction and Retail. What’s not doing so well is Manufacturing, Wholesales, Transport and Property and Business services. Whilst the strong growth in agriculture is a good sign the rest of the industries that showed growth only had small increases. Undoubtedly the retail figures are backed in part by Rudd’s stimulus package which also drove up imports. There was also some additional growth (about 0.5% from the previous quarter) in terms of exports, which could be put down to how cheap our dollar was until recently. The most worrying parts of these figures are the manufacturing and property and business services, as they represent a good chunk of where Australia’s future problems lie.
When the manufacturing numbers are down it usually means that there’s been a downturn in demand and this has been seen for the past few quarters. Whilst we can easily point the finger at the GFC for this one it signals that there is a decreased demand for production within Australia. Further to this we’ve seen an increase in the amount of imports over this last quarter showing that less is being sourced from within our country. Due to the dollar rising this could soon change however I believe the damage might have already been done, as many manufacturing plants have already begun to thin their workforces. Trying to take advantage of the strong local dollar will prove difficult for such companies as they will no longer have the capacity to increase production.
The property and business services is a little less worrying as there has been quite a lot of wealth knocked out of the top end of the market which will drag the entire sector down. Business are also cutting back on expansion plans and additional services so this is not particularly surprising either. However this figure still represents a downturn in this sector, but I believe that it is far better placed to recover than manufacturing is.
So overall I believe Australia’s resource backed economy is serving it well through this recession. We’re still feeling much of the pain from the GFC but at least there’s some signs that once confidence comes back to the markets Australia as a whole will be well placed to take advantage of it. The key issue for the Rudd government now is how to keep unemployment low through the next year or two so that we don’t lose our strong resource and manufacturing workforces, something which will cost a lot more to replace in the future.
¹Australian Bureau of Statistics, 2009, Australian National Accounts: National Income, Expenditure and Product, Mar 2009 cat no 5206.0 , viewed 04 June 2009, http://www.abs.gov.au/AUSSTATS/[email protected]/productsbyCatalogue/35F488B5F9F7D242CA256DF000814610?OpenDocument