Andrew Bell’s Market Update: Is The World Economy Behaving Itself?

MARKET WRAP
Issue 15   |   July 20th, 2017  |  Is The World Economy Behaving Itself?

Each month the Reserve Bank of Australia offers its perspective on how Australia is travelling. We all have our own opinions on Australia at present, and that is off how we are all feeling in our own little pocket of Australia. The Reserve Bank’s read is purely on the economic front. It is interesting to look at the latest report.

IS THE GLOBAL ECONOMY PICKING UP?

Of course, we do not operate independent of the rest of the world, so the view is that the global economic growth is slow and has been for some time, and in many places is actually slowing further. Fortunately for us, our major trading partners, and in particular, China and India, are generally outperforming the world and that is a big plus for Australia. I think everyone is aware that separate to the Trump factor, the US economy is picking up, which is reflected by the strong activity in Wall Street, more jobs and so on. In fact, I was in the US a few weeks ago and I was amazed by the significant increase in construction across all areas; housing, commercial and infrastructure. Two key factors around the world are that inflation is low and unemployment is falling in the three biggest economic regions, meaning overall the major economies are slowly improving. The Reserve Bank fundamentally is saying ‘the world economy is behaving itself’. There have been a lot of concerns in the past about a world recession and our Reserve Bank says this is now fading and that we just simply have to come to terms with the fact that we are in a low growth, low inflationary environment, which is likely to remain with us for some time. Despite most central banks having tried to stimulate their individual economies by low interest rates, in general it just has not worked.

Looking at the Australian economy, our economy is now growing at a much slower pace than the long run averages and more in line with the lower growth environment the rest of the developed world has experienced since the Global Financial Crisis. However, the Reserve Bank says we are performing better than most other economies with uninterrupted growth for over a quarter of a century. It reminds us that we are like the rest of the world in a low inflationary environment, which is one of the reasons the Reserve Bank can keep official interest rates so low.

AUSTRALIA: THE WORLD’S GREATEST ECONOMY?

They say the Australian household wealth is strong and now, after a period of slashing our cash rate following the GFC, we are spending a little more and that is good for our economy. Despite concerns about rising house hold debt, particularly off credit cards and borrowing for real estate, the Reserve Bank says that Australian households are amongst the wealthiest in the world and our assets are increasing in value faster than our liabilities. They are largely of course talking about real estate assets.

They have also addressed the issue of household debt saying that despite record high levels of household debt, falling interest rates mean the debt is more affordable than ever with average household debt, as a percentage of disposable income, being at an affordable level. The Reserve Bank, like ourselves, do know the risks associated with this higher debt when interest rates start to rise, and they have made separate statements about this.

The Reserve Bank goes on to say that currently we are creating jobs and the unemployment rate is holding steady and dropping, but they do acknowledge that part time work and underemployment is a little hidden within those figures.

In summary they are saying that all in all, our economy is sound and we are in a period of low economic growth with low inflation, low wages growth and low interest rates. Whilst it does not feel good, because there is nowhere near the spectacular growth that we remembered in the 90’s and in the early 2000’s, it is in fact how the rest of the world has been operating for some time now.

WHAT ARE THE RISKS?

There are still risks. Our one quarter of negative economic growth in the September quarter last year reminded us that recession is the next step down from low growth and we must always be careful not to move into that space. Hence the continued low interest rate environment. This certainly suggests the Reserve Bank is unlikely to increase interest rates for quite some time, but that has not stopped APRA making bank lending very challenging at present by tightening regulations across many fronts.

The Reserve Bank report is not one we would describe as an exciting report, but one that reminds us that whilst there is so much discussion about how unspectacular our economy is, we are actually doing better than most.

Well, that is it for now. I look forward to being with you in a fortnight.

Andrew Bell, OAM
Chief Executive Officer
The Ray White Surfers Paradise Group

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