Tim Toohey, Goldman Sachs head of macro research for Australia and New Zealand, may not be forecasting a rate cut for Australia anymore but that doesn’t mean he thinks the outlook for the economy is rosy.
At Goldman’s global macro conference in Sydney this morning, Toohey told the audience the economy continues to face some important challenges in the year, and years, ahead.
Many of those challenges are well known but Toohey’s presentation differed from consensus in three key areas.
On Australia’s business investment outlook, Toohey told the audience he couldn’t quite understand why consensus and the Australian Treasury’s expectation for private sector investment are so optimistic. His own, which he said simply reflect what the CapEx survey from the Australian Bureau of statistics show, are for much bigger falls.
To highlight his point Toohey said the CapEx survey “has always been a reliable indicator” of what companies will actually do with their investments in the year ahead.
Toohey is also skeptical about the employment outlook.
He highlighted that part of RBA governor Stevens’s positive take on the domestic economy in his statement after the board meeting this month was based on the strength of the employment market. But Toohey expects employment growth to “normalise” in the months ahead on a number of factors including the rotation in the survey participants, which the ABS itself has said increased the overall employment picture.
He also said published employment figures from the ABS had diverged markedly from those implied by the employment sub-index of the NAB’s business survey.
These two factors, weaker CapEx than forecast and the normalisation of employment, combined with the global outlook mean that “the odds are high that policy accommodation is not yet finished” from the RBA.
That is especially the case if, as Goldman Sachs did today, the market re-appraises the timing of Fed hikes in 2016.
The outlook for the Fed is important, Toohey said, because it impacts the level of the Australian dollar and the stimulatory impact that lower levels bring to the economy. That’s important for the outlook for growth and the path of RBA monetary policy. That’s particularly the case if the Australian dollar doesn’t follow Goldman Sachs expectation that it will fall to 67 cents this year. The chances of another RBA rate cut increase materially, Toohey said, if the Aussie looks like it is heading back up toward 75 cents.
There is one challenge Toohey said which might stay the RBA’s hand, or at least give them pause, before another cut. That is the level of debt built up in Australia since the GFC.
Toohey pointed out that while there is much talk in markets about the 79% increase in China’s overall debt to GDP ratios since 2008 “not much is said” about Australia’s own 49% increase in debt over this period. Australian households have increased debt by 19% since 2008 while the government’s debt position is up 22% in that time frame. These increases are exactly the same percentage increase as these two sectors in China, Toohey said.
That’s a problem for the economy and it’s also a problem for Australia’s AAA rating because the “fiscal consolidation process” has not even really begun in Australia.
The RBA governor opened the door to another rate cut on Tuesday. Markets are waiting for further clarification with the release tomorrow of the bank’s quarterly Statement on Monetary Policy. If Toohey’s right the chances of that rate hike coming are rising.
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