Strong is what happens when you run out of weak: that’s one of the slogans on the wall of my local gym.
It also might be an apt analogy for the Australian economy, which this week showed signs it might be finally starting to turn the corner.
Of course, that’s not the RBA’s story each month when it talks about growth being below trend. Any talk of growth at trend or above is premature over the next 12 months in Australia.
But there are enough signs in the economic data this week to suggest that monetary policy is finally gaining traction where it should and pushing the domestic economy in the right direction.
That means, as Alan Oster wrote in his note accompanying this week’s better-than-forecast NAB Business survey, even though he still believes the RBA will cut in May, it’s no longer a certainty.
Take Business Conditions, for example, where there is a clear, if subtle uptrend taking hold.
This month’s survey showed a rise of 4 points to 6; trading jumped 5 points to 10 and profitability surged 6 points to 8. Oster said this “level of conditions is pointing to a slightly above average rate of activity.”
RBA boss Glenn Stevens wants business to invest and let loose its animal spirits – and this is a sign that perhaps it’s happening.
The problem of course is that the customers business rely on in the economy – consumers – are incredibly negative at the moment. The ANZ’s weekly confidence survey still has consumers hunkered down with confidence near 8-month lows.
We know this is in part because of Joe Hockey’s last budget and fears he’ll repeat those mistakes. But if Joe Hockey can deliver a no worries, no shock credible budget, confidence can recover. The fate of the economy, or at least the domestic part, is really in the treasurer’s hands in a way it hasn’t been since Peter Costello signed his agreement with the RBA back in the 1990s, effectively ceding control of the economy to the RBA.
But there is something worth noting amid the weakness in consumer confidence and concerns about its impact on the economy. Confidence is not influencing spending in the manner that you might expect.
Take monthly retail sales for example. This month we saw a huge beat on expectations with the print of 0.7% for February. That was against expectations of a rise of 0.4%. Now of course the Cricket World cup might have played a role, but the reality is average retail sales in the past six months have increased to +0.5% – and that’s with one month recording a 0.0% print.
Likewise, the average for monthly retail sales growth since the Abbott government was elected is 0.4% against an average since 2010 of just 0.3%.
People may feel concerned about the future and fearful of job losses, but the shackles are slowly coming of their spending.
What could really see consumers opening their wallets is the improving employment situation.
Yesterday’s massive jobs print of 37,700 jobs for March is, on its own, enough to change the outlook. For some traders and commentators it’s a sign that the economy is turning.
But the reality, as NAB chief markets economist Ivan Colhoun points out, is that more attention needs to be paid to employment rather than unemployment.
“Australia currently has a record level of employment, with some 11.7 million persons employed, 151,000 higher than in February 2014,” he wrote in a note BEFORE yesterday’s data was released. You can now add another 37,700 to that number which takes the total number of workers in Australia to a fresh all-time high of 11,720,294.
The good news is unemployment also looks like it might have turned the corner. It’s a little early to call the top but if unemployment falls below 5.9% we’ll be able to say the trend has turned.
That’s not enough for RBA Board member John Edwards. He told the Wallstreet Journal that the numbers were “unambiguously good”, but said it was too early to say the market has “turned a corner.”
“We know that mining investment is continuing to decline and will for likely several years to come, and we know that government spending is very slow and a drag on growth,” Edwards said.
Which of course is the point of the RBA constantly telling Australians to expect below trend growth. Mining investment has left a big hole in economic growth and the massive fall in the terms of trade has a massive negative impact on national income.
Now of course the Australian economy is not just about iron ore, as ANZ CEO Mike Smith pointed out earlier this week. But, because the market, companies, and crucially governments have been blind-sided by the speed and depth of the crash in iron ore and coal – our two biggest commodity exports – there is a massive unexpected hole in national income. That hurts growth.
But iron ore is showing all the signs of having bottomed now that Hockey and everyone else seems to have given up on it. September 62% Fe CFR China iron ore futures on Nymex have rallied back to $49 a tonne. That’s almost 10% higher than the low of $45.50 earlier this month.
So, even thought the IMF and everyone else is still forecasting further big falls in the price, perhaps the fact that these falls would materially damage the income and share price valuations of big iron ore producers on a 12-month forward basis means we are closer to the bottom – perhaps at it – than many think.
The Australian economy still has significant headwinds, but the tentative positive signs in business conditions, profitability and employment, combined with an Aussie dollar below 80 cents and a still strong likelihood that the RBA will ease rates again soon, all add up to an economic outlook for Australia’s second half which might start to brighten considerably.
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