The last month has been an interesting one for the Australian and global economy. Developed market stocks, with the exception of the ASX 200, have all recovered their August losses and in the case of the bellwether S&P 500 approach all-time highs.
That’s occurred at the same time that the Australian economy has hit a flat spot and expectations for Chinese, emerging market, European and global growth have been downgraded. It’s also occurred at the same time that the US Federal Reserve has made it clear that it is most likely going to be raising rates at its December meeting for the first time in nine years.
So it’s no wonder that even as observed business conditions in Australia remain solid business confidence has fallen back below average levels.
To guide businesses through this continued turmoil we’ve tried to separate the wheat from the chaff. These slides summarise what’s going on and where the Australian economy is at the moment to put you in the picture.
The ANZ-Roy Morgan consumer confidence survey hit its highest level since January 2014 in early November to 116.6. The increase in confidence was driven by an increase in consumers attitudes about the economic outlook.
Sentiment towards the long-term economic outlook surged 7.5%, overshadowing a smaller 2.8% bounce in near-term expectations.
On balance still looks like a bright backdrop for business from the consumer sector.
The NAB business survey showed that while conditions held firm at a decent +9, confidence slipped back to +2 from +5.
The key takeaway is that business is now starting to feel the pinch in the lower Aussie dollar because they can't pass on price increases. The weak confidence, and inflation, could be saying something about the underlying economy and taken together with the increased chances of an RBA rate cut in early 2016.
Over the past 14 months the Australian dollar has fallen 23 cents or around 25%.
That's been positive for the economy but with no pricing power businesses are increasingly reporting the Aussie’s fall is now a headwind to their businesses.
Perhaps that's why the RBA's rhetoric has changed. But with the door to a rate cut open and most forecasters still looking for a fall into the mid-60 cent region this could further dent business confidence, hiring intentions and profitability.
Governor Stevens said this month that the most likely path of interest rates was down. This was highlighted in the RBA’s November Statement on Monetary Policy.
'At the November meeting, the Board judged that the prospects for an improvement in economic conditions had firmed a little over recent months and that it was appropriate to leave the cash rate unchanged. At the same time, the Board recognised that the economy is likely to be operating with a degree of spare capacity for some time yet and noted that the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand.'
The question is whether the lack of inflation and price power indicates a lack of demand in the economy. If that's the case the RBA will ease in 2016.
There has been mounting evidence that the heat has been coming out of Sydney’s property market after years of double-digit gains. The tightening of investor lending rules and interest rate increases announced by all the major banks on mortgages are starting to bite.
The question now is whether prices will merely stall or if the market will reverse and see a period of price falls. This chart from Deutsche Bank shows the relationship between clearance rates and price movements signals a deceleration in growth. This suggests prices may fall if clearance rates continue decline.
Debt is already a big hand brake on domestic growth. If consumers become concerned about a pullback in house prices confidence could be hit. But strong employment is an important counterpoint.
The OECD is forecasting the global economy to grow at less than 3% in 2015. That’s its weakest pace of growth since 2009 – yes, the dark days of the GFC.
'In 2015 global trade growth is expected to grow by a disappointing 2%. Over the past five decades there have been only five other years in which trade growth has been 2% or less, all of which coincided with a marked downturn of global growth,' the OECD said.
That, and leverage in emerging markets, is a concern for the outlook as the Fed moves towards increasing rates in December.
Nothing may happen but it’s a danger that is reflected in business surveys at the moment and is weighing on confidence.
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