It’s been easy – almost fashionable – to be downcast about the Australian economy and its prospects over the past year or so. To a certain degree that’s hardly surprising given many observers, both professional and casual, are still anchored to the post-GFC boom days when mining investment and high prices for coal and iron ore saw the economy and dollar soaring.
That reference point, in many respects, is as good as Australian economic growth could get, with the convergence of Chinese stimulus, mining investment, low interest rates and soaring prices delivered the nation a once-in-a-millennium dividend.
So even though Australia’s economic growth is still currently below trend, the reality is that the perception of what is “normal” to many commentators and business owners could be too high.
That’s important because even though the June quarter GDP printed an anaemic 0.2%, dropping the annual rate to 2%, the Australian economy just completed its 25th year without recession. And while the RBA continues to warn the economy is growing below trend, the growth forecasts continue to be a relatively healthy.
The RBA is forecasting 3.0% in 2016 and 3.75% in 2017. To many that appears optimistic.
However, even 2.8% not terrible growth by any stretch of the imagination and even though headwinds exist, the outlook for businesses in Australia is far from bleak.
These slides summarise where the Australian economy is at the moment to put you in the picture.
One of Malcolm Turnbull’s reasons for challenging the previous PM was to change the economic narrative and restore confidence. Initially consumer confidence bounced strongly but it has slipped over the past 2 weeks, giving back around 50% of the gains.
While consumer confidence continues to be buffeted by the slowdown in global growth and market volatility there are signs that Australia's business sector was already being re-invigorated by a lower AUD/USD.
Net on net it looks like a bright backdrop for business from the consumer sector.
The Australian Industry Group reports that the services sector is having its longest expansion since before the GFC while manufacturing is having its best run since 2010. Construction also expanded.
That's the good news accompanying an improvement in business conditions reported in the last NAB's business survey. To put that strength in context, the survey shows business conditions at 9 over the past two months are much stronger than the post-GFC average of just 0.3.
The dollar is now back in the price zone which provided substantial support, and an economic stabiliser, during the dark days of the GFC. RBA research shows a sustained fall of 10% buoys growth by 1% or more in the years following that fall.
Evidence from the AiGroup surveys suggest the Aussie dollar is a big part of the improvement in services and manufacturing. AiGroup CEO Innes Willox said recently:
This broadening of the sources of domestic growth is an encouraging sign of an economy responding favourably to the stimulus of low interest rates and the further fall in the Australian dollar...Local tourism, retail and other consumer services are noticing the benefits of the lower dollar offsetting the higher local currency prices of imported inputs.
Most forecasters, and the Reserve Bank, are looking for current levels to be sustained with many expecting further falls
RBA Governor Steven’s said this month:
In Australia, the available information suggests that moderate expansion in the economy continues. While growth has been somewhat below longer-term averages for some time, it has been accompanied with somewhat stronger growth of employment and a steady rate of unemployment over the past year. Overall, the economy is likely to be operating with a degree of spare capacity for some time yet…
In such circumstances, monetary policy needs to be accommodative. Low interest rates are acting to support borrowing and spending. Credit is recording moderate growth overall, with growth in lending to the housing market broadly steady over recent months. The Australian dollar is adjusting to the significant declines in key commodity prices.
The Board today judged that leaving the cash rate unchanged was appropriate at this meeting.
That’s not a man in a hurry to hike rates, and financial markets believe rates are biased toward easing.
Earlier this year RBA assistant governor Christopher Kent said monetary policy was still working but there were significant headwinds and, crucially, the transmission mechanism wasn’t working as well as it might – think slippery clutch in the car.
Kent said this level of debt and concerns about unemployment are combining to restrain household spending and boost saving.
Kent intimated that Australians have too much debt and are concerned about paying it back. He added that even with the strong growth in employment for whatever reason, Australians are really worried about losing their jobs. That would threaten their ability to repay their debt, feed their family, and keep their house.
Debt is a big hand brake on domestic growth.
Business executives are more downbeat about the state of the global economy now than at any time this year, particularly in emerging nations, with turmoil in financial markets fueling concerns over the economic outlook both at home and abroad.
That’s the downbeat assessment to come from global management consulting firm McKinsey’s September quarter economic conditions survey.
Volatility begets volatility and market sentiment remained fragile during the month.
Initially the selloff was a result of fears of the impact of the start of the Fed tightening cycle. But when the FOMC mentioned the US dollar and concerns abroad as the reasons for not raising rates markets sold off again on increased uncertainty.
There are signs however that markets are trying to stabilise after the past 6 weeks of volatility. Overall sentiment remains nervous however.
If the turmoil and volatility can recede the global outlook will brighten.
China’s real economic growth rate consistently divides the markets. Some believe the 7% figure reported by the government is accurate, merely reflecting surging activity in the services sector as other areas of the economy slow, while other believe it’s too good to be true, particularly given weakness in other data releases such as industrial production, fixed asset investment and PMI surveys.
According to MFS Investment Management, economic growth in China is not as robust as the official government figures would suggest, suggesting that the economy is almost certainly growing well below 7%.
But they also add that because the Chinese data doesn't include the burgeoning services sector and because they believe services are growing much faster as a share of the economy than it was five to 10 years ago, that a large chunk of overall growth is being missed.
Perhaps that explains why with all the negativity there are signs in housing and other sectors that Chinese growth is stabilising.