If you’re a home owner with a variable rate mortgage the past year has been pretty kind to you with the RBA slashing a good 1% off the cash rate, an extraordinary amount of breathing room for many people. It’s also provided some relief for those who dived head first into the property market at the bottom of the Global Financial Crisis, taking advantage of the cheap rates, and over-extended themselves with a loan that was too big for them to handle comfortably. This in turn should be putting an upwards pressure on inflation as people spend more thanks to their incomes being freed up from mortgage payments however it seems that the past year of cuts wasn’t enough and the Reserve Bank of Australia might be lining up to cut rates yet again.
Futures markets have been pricing in a rate cut with a likelihood of 85% which means they’re almost certain that the RBA will cut rates in November. There are several plausible reasons for this like the government returning the budget to surplus and inflation coming in below the RBA’s target however some of the other reasons cited have me a little confused. Weaker currency prices aren’t fixed by rate cuts, they will actually make the currency comparatively cheaper, and citing them as a reason to cut rates would be counter-intuitive. I might be misinterpreting what the article means however as the currency trading rates are only casually mentioned.
The reason why this rate cut and not the ones preceding it have got my attention is the fact that with 1 more 25 basis point cut to the official cash rate we will officially be equal to the rates we saw back when the GFC was in full effect. Now we’re not exactly in the best of times at the moment with the Eurozone Crisis still playing out however we’re not in the midst of a global recession either with most developed countries, including the instigator of the last crisis, having several quarters of positive growth under their belt. The unemployment rate, whilst still being far above its pre-GFC minimum, has remained fairly steady in the 5% range over the past year as well which makes it even more confusing as to why the RBA would look to cut rates at this time.
Looking at their decision for this month where they cut 25 basis points off the rate it’s clear that they’re taking a pretty long term view and I’m not sure what’s changed in the weeks since then that could lead them to believe that they needed to drop rates to a record equalling low. The softer global economic outlook, lower commodity prices and low inflation are all valid reasons to drop the rate however they really haven’t changed in the past month and if another drop is warranted so soon after the previous one it could have easily been rolled into it, giving a single cut of 50 basis points. The RBA is usually reluctant to do rate cuts of that magnitude however (last time it happened was at the start of this year and prior to that it was the massive cuts due to the GFC) but the flip side of that is that the markets usually react better to larger cuts. I’m no economist though so there might be some deeper strategy to this that I’m just not seeing.
Considering the relative economic positions between the peak of the GFC and now it just seems odd that we need to have the cash rate at the same level. The global economy not hurting anywhere near as bad as it was at the same time all those years ago and whilst there are indicators that suggest a rate cut might be warranted it seems over zealous to drive them down to the same levels as when we were on the verge of recession. I’m most certainly not going to complain however as it only means good things for my current investments but I’m more interested in the underlying factors that might drive such a cut. I guess we’ll have to wait until November 6 to find out as anything up until then is going to be firmly in the realms of speculation.
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.
This morning brings some good news for America and the world at large. After 4 consecutive quarters of the GDP shrinking, the unemployment rate rocketing to 9.5% and the financial markets flailing around in a complete mess the United States of America have managed to drag themselves up out of the dank depths of recession and post some exceptionally strong growth (given the circumstances). Of course it’s not all sunshine and rainbows over there yet, and Obama has recognised this with his recent speech on the matter:
Oct. 29 (Bloomberg) — President Barack Obama said U.S. economic growth in the third quarter affirms that the recession is abating, adding that the nation has “a long way to go” to fully recover and reduce unemployment.
He said a Commerce Department report that the economy grew at a 3.5 percent pace in the third quarter, after shrinking for four quarters, is “welcome news and an affirmation that this recession is abating.” It isn’t enough, he added.
“The benchmark I use to measure the strength of our economy is not just whether our GDP is growing, but whether we’re creating jobs, whether families are having an easier time paying their bills, whether our businesses are hiring and doing well,” Obama told business leaders in a speech on the White House grounds.
He’s being cautious in trumpeting this as a victory for himself and his party and this is with good reason. Right now the last thing that any economy needs is uncontrolled growth as that will just get us back in the same situation in a very short period of time. Right now this serves as an indicator that the work the Obama administration has done in order to combat the financial troubles experienced in America worked and the lessons of the past have not gone unheeded. It would seem that all the naysayers about the various stimulus packages will have to take another look at what they’ve said as it appears that Obama’s ideas have worked despite their vitriol.
Hopefully this is the kind of indicator that will prompt companies to start rethinking their strategic direction. For the last few years most of them have been in at least one form of damage control or cost reduction scheme in order to stay in business. This is of course what has lead to the high unemployment figures that are currently plauging the USA. A few quarters of consecutive, small growth will see most businesses rework their directions from “staying alive” back to business as usual and this will easily be tracked in the unemployment rate. In fact the last 3 months have seen a drop in the unemployment rate of 0.2%. It’s not much, but it’s definitely a start.
For as long as the GFC has been in effect I’ve always been very skeptical about how long its effects would last. Sure when you tallied up the dollar amounts that were lost or “potential loses” the situation looked extremely grim, much worse than the great depression. The knowledge of past recessions however let us ride through this with a few bruises but wiser for the experience. One good thing that’s come of this is tighter regulation of the banks in the USA, something which could have prevented this disaster from happening in the first place.
Overall this is great news for the world at large. When the giant of America was toppled by its own system the world rightly went into panic. After battling naysayers, unwilling congress critters and the scathing eye of the media Obama has won himself a hard fought victory for all of America and this will resonate with the public.
Like my fellow blogger said, he’s going to have no trouble coasting into re-election come 2012.
As I promised over a week ago the Labor Force results for August have been released by the Australian Bureau of Statistics. On the surface things appear to be great, as the unemployment rate has remained steady at 5.8%. Drudging through the figures though reveals another story, with a lot of things not painting such a rosy picture. Whilst they are a sign that things are stabilizing and won’t be as bad as some predictions they’re still far from the kind of green shoots many would like to see before breaking out the champagne. In fact the results were something of a turning point for me, as a metric that I believed was valueless for measuring an economy’s performance outlines the problem perfectly.
The first thing that crops up when looking at these recent figures is that in fact Australia’s working population decreased by 0.2%. This was offset by a decline of the same amount in those looking for work, which is what kept the figure steady. Other metrics remained steady as well, although this is likely due to the fact that all the people who can work are still working. The shocking metric that did it for me was the one of underemployment.
I’ll be the first to admit initially I felt that the use of this metric was an attempt at shifting the goal posts that the doom and gloomers were using in their arguments against me. Every time a sign of economic recovery comes about I always hear of some new metric that if you watch the trend over the past few years shows that we’re all doomed and there’s nothing we can do about it. So I was fairly sceptical when they started spouting underemployment and wrote it off for a good while. Then I came across the statistic in the Labor Force results and decided to have a look into the ABS’ methods and what it could mean for the workforce at large. In essence underemployment refers to people who have the ability and want to work more hours but simply can’t because the work is unavailable. Looking at the current statistics for this quarter pegs this rate at 13.9%. That figure in itself doesn’t mean a whole lot but the trend says quite a bit:
You can probably guess where I’m going with this. Since 2001 the underemployment metric was trending down quite nicely. This is as you would expect in economic good times where there is quite a lot of work available for anyone who wants it. However around 2008, when the GFC started to rear its ugly head, it started trending back up and did so at quite a high rate. This was as result of employer’s reaction to the GFC as it measures not only those losing their jobs but those who have had their hours cut but still remain employed.
The one good thing that we can take away from these figures is that while underemployment might be on the rise people who are still employed currently are much better placed when things begin to turn around. Many of those who lost their jobs will be finding it hard to break back into their industry whilst the GFC continues to unfold, but those who still have some employment can easily have their hours ramped back up when times come good. This bodes well for our economy as heavy losses of jobs means a much slower recovery once the crisis has abated. Nothing slows economic development more than the workforce trying to re-establish itself.
The figures made for some good reading for me and I’d urge you to have a look around so you can see what they mean for you. Working in Canberra means I’m often isolated to the employment troubles of the country (thank you Australian Public Service) but these figures really brought it home. I can only hope that the next quarters figures show underemployment steady, but only time will tell.
The Global Financial Crisis is hitting everyone, and with each passing day it would appear that it is hitting more and more people directly. With the unemployment rate hitting 5.2% back in March the figures do support that idea, with many economic forecasters saying that it could hit as high as 10% next year. Primarily this will hit the Blue Collar workers first as companies seek to reduce output in order to keep themselves afloat. Whilst it is a valid business strategy in time like these I often wonder what would happen if we simply forgot that this was happening.
Australia as a whole is in a strong position in terms of weathering the storm. Our economy is based strongly on resources (rather than services) and with our main export being coal for power generation and heating, which people will still want during a recession, we are well placed to continue on as per normal. However, economic growth was down 0.5% for the December quarter with the great decline shown in non farm GDP (whilst Farm GDP grew a whopping 10%!). Could it be that companies and consumers are cutting back just because of the threat of the economic downturn, and not because they are actually feeling the hardship?
Up until around September last year interest rates had been steadily rising in order to combat the extrodinarily high inflation that Australia was experiencing. It seemed that no amount of interest rate hikes could reel in consumers, even with fuel and transportation costs soaring at the same time. However, once people were told of dark economic times ahead suddenly that all changes, and the Reserve Bank is forced to try and spur the economy on by cutting interest rates in quick succession for months on end. Did everyone really lose all their spending power in under a month?
All the stimulus packages are based around the same thing, trying to inject cash into the consumers and corporations so that they’ll spend it, hopefully spurring the markets on so they’ll recover through normal means. How is this so different from having the media say to everyone “The economic crisis is over, we’ve done X and changed our policies Y… etc etc” and then have everyone return to their normal ways of spending? The average Joe has already been manipulated by the media to believe that the world is coming to an end, what’s stopping the media from telling them that everything is ok?
There is of course, a happy middle ground between what the government is doing now and blatantly lying to everyone about the current economic situation. Large government owned and funded projects like say, a light rail system for Canberra (We’ll have it one day folks!!!!) will create jobs and provide that first step into repairing the market, tempting private companies back in. I say government owned and funded mostly because of the recent catastrophe that occurred with BrisConnections, a privately owned but government subsidised project.
So I’d recommend a two pronged approach. Cease the constant reporting on the GFC and have the government start up a large number of projects in order to create some sustainable jobs for the battlers out there. It’s not the easy route and if a change of government happens next election Kevin Rudd will be hard pressed to take credit for his work. However, should he do it and ge re-elected he will be remembered as the herald of the new economic good times, something that people like me will find hard to forget.