Here's the argument that the stock market slump won't hurt the Austalian economy any further

Don’t worry, be happy. Photo: YouTube

When you are one of the biggest bears in the forest, you don’t scare easily.

So, it’s no surprise that Capital Economics chief economist for Australia and New Zealand, Paul Dales, has released a note today saying that the fall in stock prices doesn’t “materially alter economic outlook” for Australia. The firm already expects Australia’s GDP to fall to 2% in 2015 from last years 2.7%.

But, given that somewhat bearish economic outlook, you’d be forgiven for thinking that Capital Economics might be worried about the impact on investment and consumption from the stock market shenanigans.

However the Dales says “there are two reasons why the outlook for Australia has not deteriorated much.”

1.) We believe that the panic over China is overblown. The collapse in equity prices on the Shanghai market is unlikely to translate into much weaker real activity in China and the lagged effects of earlier policy loosening by the People’s Bank should shore up economic growth.

2.) the drop in equity prices already seen in Australia is unlikely to lead to a major weakening in investment or consumption growth.

With regard to business investment Dales argues that while confidence will likely take a hit, “the recent fall in equity prices is consistent with NAB business confidence falling from +3.5 in July to -7.5,” and this is likely to have a smaller influence on actual business decisions.

If history does indeed rhyme that’s superb news.

Likewise, Dales finds good news in the fact that “households can easily absorb the hit to their wealth.” He says the hit, of about $100 billion will, based on RBA modelling, lead to a 0.8% reduction in consumption per annum, around $8 billion in spending. But, he adds that “given that the saving rate is high relative to the level of net wealth there is plenty of scope for households to absorb this reduction in wealth without having to spend less.”

The question of course is whether Australian households want to eat any further into their savings to continue consuming at the same rate when their wealth is falling and their debt burden high. Dales believes they will. That means “the equity price falls seen so far are not big enough to significantly alter the outlook or the RBA’s current thinking.”

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