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Ben Kingsley Blog post by Ben Kingsley

RBA Cash Rate Decision – April 2019

Today Governor Lowe and the Reserve Board met for their April board meeting and they kept the cash rate on hold at 1.5%. No surprises there in the lead up to an upcoming election — we’re only a month or so away from the Federal Election.

I want to start looking globally first — so let’s do around the grounds globally.

The US market — so there’s definitely been some changes and sentiment shifts in regards to the confidence in the US market, and this has been led by the GDP numbers that we’ve seen come out of the US. When President Trump introduced the tax cuts, we definitely saw a bounce in business confidence over there and, obviously, in business returns and record share market prices.

We saw GDP running at around 4% at its peak — and this has since declined. We saw the Q4 result over in the US where the GDP number was 2.5%.  If we look back to the Q3 number, the annualised rate of growth was sitting at around 4.3% — so we’re definitely seeing a cooling in that market place. That’s potentially also led to the Federal Reserve forecasting or signaling that there’ll be no more rate rises throughout 2019.

Finally in the US, we then circle back to the big trade negotiations between the US and China. We’ve definitely seen the language weakening — the tough talk we saw from President Trump is now being watered down, and we’re starting to see some more collaboration in those trade talks. I think that’s also meant that the businesses and business confidence around the US are probably better than it would have been, given that the US trade heavily and so does China. It’s only good for the world economy.

The other mess that we see over in the world at the moment is really the Brexit situation going on between Britain, or the United Kingdom, and the European Union. So it’s a complete mess. It’s pretty clear now that a lot of people who voted in that referendum probably didn’t realise that they were being sold a pup. So, a very difficult situation over there — a lot more politics to play out there before we see a resolution. But one thing’s for sure: this uncertainty is not good for global growth, so hopefully, we can get some type of conclusion in the not-too-distant future.

[Recommended podcast: Episode 225 with Dr Shane Oliver – Are we in store for a Global Recession]

Let’s turn to the domestic economy.

The first thing I really wanted to talk about is really the labour market. If we didn’t have a Federal Election next month, and we were looking at a more deteriorating labour market, we would probably be seeing a rate cut this month— but we don’t have that situation. In fact, the February unemployment rate came in at 4.9% — that’s the lowest in 7 ½ years!  It certainly shows that it’s not a bad result; we’re seeing most people gainfully employed in Australia. Though, if we look forward and we look ahead — and this is where we’re seeing a lot of economists talk about rate cuts — the problem is what I am about to explain now. The jobs that we created throughout February were 4,600 new jobs — so that’s not a big number. It’s an important number to get us down to 4.9%, but it’s not a big number.

The other bit that I want to talk about is the skilled vacancies. This is an area that we should be looking at because we want people in skilled jobs, higher paying jobs, which is good for the economy — more income coming in, more spending going out; and this grows the economy overall.

Again, not showing positive signs here. So let me explain this…

In February, we saw the skilled vacancies rate of – 0.9% — so that wasn’t a great result. But that’s on the back of the January data, which was revised down from a positive 1.9% to a -0.5 % — so that has meant that the annualised paced of skilled vacancies has fallen from a -0.7% of 1% to a -2.7% in February — so that also means that there’s that confidence piece coming into play.

Overall, jobs at the moment are good — forward thinking about the confidence in the economy isn’t quite there, so let’s expand on that further and start to have a look at some of those key drivers in this area. It’s a consumer confidence story. Consumer confidence for March, which is from the Westpac Melbourne Institute index, saw a fall of 4.8% in its March reading. This then moved down to a reading of 98.8, now that’s down from a February reading of 103.8 and that means there are more pessimistic views out there than optimistic views. And this has really been led by the surprise GDP decline that we saw in the second half of last year. This has been the trigger for that concern. So that’s what we’re seeing, in terms of consumer confidence.

In regards to the consumer spending story, we turn our attention over to the retail sales for January. We did see a rise in retail sales of 0.1% — consensus for January, given we had such a poor December, was a 0.3% rise, and we just didn’t get there. So we were disappointed with this number, and it has meant that the annual retail growth is sitting at 2.7%, which is well below its long-term average of 3.7%. The contributing factors to this has been put down to things like the slowing housing market, the wealth effect, general household debt, people being more concerned about paying debt down in these uncertain times and wage growth. That’s also a story that needs to play out further, in terms of NAB’s business confidence survey — we did definitely see a deterioration in both conditions as well as the confidence in the market.  Conditions fell from a +7 to a +4 — and confidence fell from a +4 to a +2. Both of these levels, even though they still appear in the positive, are below their long-term averages. So that’s not also a good sign for the broader economy and for jobs growth. Again, that’s why we’re seeing a lot of economists predicting that we’ll see a rate cut inside this year; possibly two.

Let’s now turn our attention to housing data.

We did see some interesting data coming out. So the ABS released their quarter fall, which is the December quarter data, and that showed a fall of 2.4% for that Quarter. This means that the annual pace of the national housing market — remember though: there’s always markets within markets — but the national housing market is -5.1%. This is down from a -1.9% in Quarter 3. We did see a lot of media noise around this story; but remember that’s the December Quarter.

We are definitely seeing Auction Clearance Rates improving — and certainly what we’re seeing in the field with our team is there are a lot more buyers around.  We’re not saying it’s the madness that we saw throughout 2016 and 2017, but in the good pockets, there’s definitely one or two buyers out there for every property. We could see a stabilising of the property market, which could be further enforced by what Labor announced last Friday when they declared the date to introduce their changes to the Negative Gearing and Capital Gains Policy.

We do expect that we’ll see a bounce in existing property stock around Australia as people try to lock in their negative gearing benefits and their capital gains benefits. This, of course, is based on Labor’s policy and based on the assumption that Labor may get into power. So we probably will see a floor inside the property market because of this reason.

What happens after the 1st of January is anyone’s guess — but we’ll talk more about that into the future.

I also want to go through some interesting lending data — and this is also why I worry about Labor’s policy. In January, owner-occupier loans and refinancing data for owner-occupiers dropped by 2.6% — and that’s the lowest level since February 2013.  Now, if we exclude the refinancing figures — it’s down 1.2%, or 14.7% year-on-year. If we drill a little bit deeper — and this is why I think the policy is a pup — t the owner-occupied finance on new dwellings has been the hardest hit. This fell in January by 9.5%. So this is Off The Plan or house and land packages stuff. This is the biggest decline since October 2008 — and it’s down 27.6% on a year ago.

So you might think, “Well Labor will fix this because it’s going to introduce an incentive to buy new.”

The problem is no one wants to buy second-hand after it’s bought new. So the reality is, investors won’t play in this space. The bounce that Labor is hopefully anticipating, realistically, I don’t think is going to materialise as people start to understand that the new stock — the Off the Plan and the house and land packages — don’t grow in capital growth as well as the existing property stock.

It’s food for thought when you start to think about the housing market, and what you’re going to do in regards to your own situation. If you’re in a position to move forward on buying an existing property now, if Labor gets in, they’ve still got to get it through the Senate — I think that’s going to be a challenge. Because as more and more people realise that it’s not necessarily a solid policy and it has problems, then hopefully we’ll see some changes to that policy that will be more in line with not taking a sledgehammer to the property market, which is what this policy will do.

[Recommended podcast: Episode 37 on Understanding the Scarcity factor in Property Investment]

Finally, I want to turn to Budget night. We’re hearing from treasurer Josh Frydenberg tonight and we’re going to see a “cash flash” — pretty simple, right? We’re going to see a one-off payment coming into the people’s hands, we’re going to see tax cuts, and that’s going to be part of stimulating the economy. I think is another important reason why we saw the Reserve Governor, Dr Phillip Lowe, hold and not drop the cash rate this month. He wants to see how these tax cuts will flow through and then also see what happens to the job market if Labor gets in, which I’ll talk about more.

So, interesting time. We’ll see Bill Shorten’s reply on Thursday, in terms of what their plans are for the economy and where they’re going to spend their money. But, yeah, definitely an interesting period, which leads me to my final summary and some ideas.

Where do I see the cash rate heading?

I’ve got a couple of scenarios here. Firstly if the Liberal’s pull off a stunning election win — an unpredicted election win — I think we will see a bounce in business confidence and potentially we will maintain strong jobs, jobs growth, which will mean if we do have to put one cut in there — just to stabilise the property market — that’s probably all we may need. If Labor gets in, and given the feedback that we’re seeing from the Small Business Council and from the business associations of Australia, about their concerns of some of Labor’s policies, I suspect that will flow into jobs. And that story could see probably one, possibly two, rate cuts. Again, I have that on the back of jobs and also on the back of the property market in terms of these uncertainties and the unintended consequences that will come from Labor’s policy.

So, they’re my predictions. Form your own view; but that’s basically where I see it when it comes to what’s going to be happening with the cash rate over the course of 2019.

Thanks for watching and we’ll see you next month.

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