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Ben Kingsley Blog post by Ben Kingsley

RBA Cash Rate March 2020: The Coronavirus Spreads Right Across The Economy

Today, the Reserve Board met – and wow, it would have been a challenging and interesting meeting to be at for this March decision. Effectively, the market was pricing in at a 90% chance of a rate cut, and they got it. So the cash rate has moved by 25 basis points down to 0.5%.

Now, there was already a fairly good argument as to why they needed to move that down. So we’re talking about unemployment in January increased, poor retail spending, little inflation and the likely hood of the Australian economy being in a negative quarter of GDP at the end of March. So, that was obviously reason enough, and then you add the biggest factor of all being COVID-19 aka the coronavirus and you’ve got the reason why we’ve put that cash rate down lower. Now we do know that the government is also planning a stimulus, and I want to talk about that later. Let’s get into the data.

One big caveat around the data for this month is this coronavirus — it’s developing further and further and continuing to spread, and its contagion is continuing to grow.

So we’re going to look at this data, but we’ve also got to be mindful that some of this data is lagged data. And in most cases, the data that I’m talking about with coronavirus is the latest data as opposed to the lagged data that we’re going to be talking about, which is the positive data also potentially could be a grain of salt. So I know I’m sounding quite negative, but it’s important that we put some context around what potentially can happen.

So I want to start with the coronavirus and what it actually means to both the Australian and the global economies.

Given we’ve got the epicentre in China, what’s different about this particular disease or illness is it’s highly contagious as opposed to the SARS, which wasn’t necessarily as contagious but more fatal. So we’ve got the spread of this disease occurring quicker, and that’s obviously impacting on what we call the demand side. So in Australia and globally we’re talking about less trade, less travel, less interaction between people, less movement of people around the world. So that affects things like international students here and obviously travel and tourism disruptions around that.

The other interesting impact is the epicentre of this particular illness is obviously some parts of China. Now, these parts of China are also the epicentre of exports and manufacturing and those types of things. So we’ve got this challenge now on the supply side of the chain where we’ve got component delays or we’ve also got finished good delays being able to then exported around the world. So that has a flow-on effect in regards to those people waiting for those. Those businesses waiting for those parts and those goods to arrive so they can also execute on their business as well. So the flow-on effect of that is critical in regards to how businesses can survive or be delayed.

 And then, also about the human capital. The people that are attached to that. So we will see that impact to business and we will see potentially that impact to the jobs, and that could have an impact globally around unemployment as well.

Now, the other interesting thing, in terms that how the coronavirus affects confidence and sentiment, is clearly showing up on the world’s stock exchange. So there has been global shocks.

Last week alone, six trillion dollars was wiped off the world’s stock markets.

Now, to put that into some type of context or perspective, the Australian economy is only a two trillion-dollar economy per annum, and this was six trillion dollars wiped off global stock markets. So there is obviously uncertainty and fear that’s creeping into the markets. Now, the correction of that type of nature also impacts business confidence, and we talked about it before. Business confidence then means less investment. Less investment also means potentially less jobs around the world. So Australia is not immune to that, so that is going to be a problem in regards to that.

On the positive front, if I do a little snapshot of the US economy, it’s actually in pretty good shape. And we’ve already seen the Fed Reserve saying that they will adjust their cash rates to accommodate any increased risk of the coronavirus. So they will support that by lowering interest rates over there, and we’re already seeing a 65% pricing into a 50 basis points cut by March 18 when the Fed Reserve meets.

In terms of that, the good data that we saw, their trade deficit is also narrowing. So that means basically less imports, more exporting from the US. Income growth rose by 0.6. It was the biggest gain in nearly a year. And consumer spending was up 0.2, but it’s been quite positive. That was in December. So it’s been quite positive in terms of what’s going on there. Now, that’s I reckon, again, pre-coronavirus. So we’ve got to be mindful of that.

The next bit of data I’m going to share with you is out of China, and this is probably the first bit of data that we’re seeing that we got over the weekend, in terms of China’s manufacturing Purchasing Managers’ Index sank to its lowest level of all time. So basically, the manufacturing purchasing index fell to a record low of 35.7 in February, which just to give you an idea, in the previous month, that recording was 50. Now, this is again some of the first bit of data that we’re seeing coming out of China where the coronavirus is having an impact. Now, again, to put that into some type of perspective, most economists were expecting that to drop to 45 instead of 35.7. And to also put it into context, during the GFC, it dropped only to a low of 38.8, which was back in November of 2008. So it is absolute material in terms of how this is impacting the Chinese economy.

I haven’t spent much time on Europe and UK. I’ll move through those because ultimately, the data that’s there is not going to be relevant for the next few months moving forward.

So I now want to turn my attentions back home.

Some of the big news that we’re seeing here is the Australian dollar.

So the dollar, which a couple of months ago was trading 68/69 is now trading at around that 64 mark – 64.5 cents – and could go as low as 63 cents. So that’s obviously good for our exporters, but it’s also putting pressure on us in terms of traveling and buying our imported goods from overseas. So that’s something to watch as well.

In terms of consumer sentiment … And now, this was a pre-reading of the coronavirus starting to spread quicker. So we saw an increase, it was up 2.3 to a reading of 95.5 for February. So that was on the back of some pretty poor readings in December and January on the back of the bushfires, and obviously the drought. So what are we seeing here? Well, that’s the easing of the drought concerns. That’s also the rain that we received in regards to that. So the weather improvements, our water storage in the dam areas were improving as well. But again, I suspect the coronavirus increasing outbreak will sew that number as being tested when we get that number for next month. So there we have it in terms of the consumer sentiment.

Unemployment I mentioned earlier. Increased in January to 5.3%. That was obviously after two falls in the unemployment rate. We saw that get as low as 5.1. So obviously, there’s still spare capacity evident in regard to what’s happening in our unemployment space. And who knows how quickly that is also going to be impacted by this outbreak of the coronavirus? In terms of wage growth, the wage growth index saw a rise of 0.5, which is the third consecutive quarter. So that’s the December quarter number, which the annualized wage growth is now sitting at 2.2%. So not where we want it in terms of we want to see a little bit higher than that, which will put pressure on inflation. But still not negative, and certainly a lot of people talked down the wage growth that’s occurring in this country, but it is still 2.2%. So let’s not get too pessimistic around that.

Now, in terms of the property story, which is what I want to spend a fair bit of my time on in this presentation, is around … So credit. What we have seen in the credit space. Private sector expanded in January by 0.3. Housing credit was up 0.3 of 1%. Housing credit for owner-occupier was up 0.4 of 1%. And investor lending was up for the first time since December of 2018, but it was only up 0.1 of 1%. But it’s still moving in the positive direction. Business credit rose 0.5 of 1%, which is the highest pace since March of 2019, so businesses were just starting to get confident. That was showing up in how Governor Lowe was talking about his thoughts on the economy before coronavirus started to impact that sentiment piece. So yeah, we did see some really positive numbers, but again, that may be short lived until businesses work out exactly what the impact is going to be on them. And that is effectively a moving feast at the moment.

Construction data. So we did see the December construction data. We saw a fall of 3% and we saw definitely the lowest levels of construction activity for the last three-and-a-quarter years. So that’s the back of the fourth quarter of last year. So we’re talking about lagged data. Residential construction. It has been a horror year for 2019 for residential construction. So it plunged 4.6% over the quarter and was down 12.8% over the year. Now, in terms of quarters, we’ve seen six negative construction decline quarters, and that’s the lowest downturn phase since the middle of the 2020s. So it’s been a very difficult time in regards to construction.

We move on to new builds. So new residential building fell by 5.1%, and also alterations and additions fell by 1.3%. So that’s been a difficult story for the residential construction sector. Non-residential construction is on an upward trajectory as opposed to what’s happening in regards to the construction of residential property, and that’s really been led by the mining sector. So mining is leading the way, and that’s a good sign for obviously the Western Australian economy and potentially for the Queensland economy as well.

Now, on a positive note. Building approval. So this is that forward upstream data that we see before we see the construction activity. So the monthly building approvals, they are quite volatile, but in trend terms we did see a positive number come out in December. It was up 2.1%, which is the fourth straight month where we are seeing those approvals starting to take shape, and hopefully that will lead to additional construction. So that’s a positive story potentially for the construction sector moving forward.

Now I want to talk about CoreLogic. Our good friends at CoreLogic have provided us with their latest data. The February data. I just want to highlight some of the important points here.

We did see a surge in property prices in the February month, up 1.1% nationally.

And we recorded five of the eight capital cities reaching a record high. So the price movement for property is still quite strong. Some highlights in there, obviously. Sydney up for the month, 1.7, and annualised up 10.9%. Melbourne up 1.2, annually up 10.7. Brisbane up 0.6 for the month, annually up 1.9. Adelaide up 0.1, annually up 0.4. Perth. Now, little side segment for Perth because this is important. Okay. We’ve seen for the first time, four consecutive months where dwelling prices have avoided a fall. Okay. Now, that’s the first time since mid-2014. So we’ve got four months where we’ve recorded small growth but no falls inside that period. So that says to me that we may be near the bottom or have found our bottom in that Perth market. That said, how quickly is it going to return? And remembering, from the bottom it’s still 21% off its peaks from the previous mining boom that saw Perth property prices rocket up to the levels that they were. So something to be mindful there. So 0.3 of 1% for Perth, annualised still negative 4.

Hobart 0.8 for the month, annualized up 5. Darwin is one of those cities that continues to see price falls, so negative 1.4 for the month, negative 7.8 for the annual figure. Canberra up 0.8 for the month and 4.1% for the annualized year. So that’s where we sit. So what we are now seeing is these cities are at record price points. Melbourne is there. Brisbane is there. Adelaide is there. Canberra is there. Hobart is there. So they’re now at record median levels along with Melbourne. So Sydney is the only city that is not at record level. So even though despite it’s grown by 10.9%, it still remains 3.7% below its 2017 peak. But that is giving you a fairly good story in terms of what’s happening in regards to property prices.

So my final observation for the month of March is really now focused on what the federal government can do.

So we’ve realised that there’s not much that the RBA can do in terms of continuing to do the heavy lifting when it comes to monetary policy to stimulate the economy.

And the federal government now has the crisis that they need where they don’t have the political damage of moving away from their surplus argument. So we saw them hold firm on that, but now really with the surplus beyond being achieved for this financial year, they are now going to have to do some stimulus activity. So that stimulus activity is still going to put them in good stead because they can argue the point that the coronavirus has affected the global economy. And so what we’re going to see is this stimulus starting to roll through.

Now, how much they spend is also political in a way because they still want to hit that surplus the following financial year so their credentials of being re-elected are going to be stronger, because they would have brought the budget back into surplus. So it’ll be measured to start with, but they will leave themselves some wriggle room to continue to keep adding for that surplus. Now, the reason for that is obviously two-fold. One is the economy does need to ride through this period, but they also don’t want to be at the helm if we see two negative quarters of economic growth. Because if we do see two negative quarters, we’ve potentially got a technical recession. So they don’t want to be at the helm to break the record streak that Australia has currently got in regards to positive economic growth. So that’s my message here. We’re going to see the language change from the federal government and we’re going to see some stimulus come in. But I don’t think they’re just going to throw basically everything, the kitchen sink. at it. So that’s my first message.

My second point in my final observation is that we’ve also got to be mindful to put this into perspective. There is a lot of uncertainty, and with uncertainty becomes caution and fear and over exaggeration around this virus, I should say. And that led me to the point of a vaccine. We will see a vaccine created for this particular deadly virus, and it’s obviously affecting many of us around the world in terms of what it’s doing to us. So once the vaccine has been tested and then basically made available, then you’re going to see all this pent up demand and supply, all of those orders are going to have to be filled, and there’s going to be a real uptick in global economic activity. So the virus will be, as per SARS, but this will be more significant than SARS … But you will see an absolute spike in economic activity afterwards, and you’re most likely going to see a spike in the stock market.

The $500 million question though is, when?

What is the timing of when that vaccine will be released? And when will this pandemic basically reach its crescendo and then we start to get in on top of it? So that’s the question that nobody can answer. So for now, just have that at the back of your mind that this event will pass and there will be a time where we see prosperity and that growth story coming back in waves. So that’s my two bobs worth.

Just remember, knowledge is empowering, but only if you act on it. And we’ll talk to you next month.

Categories: Mortgage Broking

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