19 June 2017
Over the past week Australian shares rose 1.7% largely reversing last week’s decline. The US and other developed countries were flat while emerging markets fell 1.5%. The Australian dollar extended its rise from the previous week by 1.2% to 76.21 US cents. The 10 year bond yield in Australia increased 0.01% to 2.41% while in the US, the 10 year bond yield fell 0.05% to 2.15%. Oil prices continued their four-week slide, down 2.4% for the week to 44.70 US dollars per barrel.
Is Australia’s economy in a soft patch? That’s the question on the lips of many at the moment. Of course the media has taken it a step further by calling it a recession.
First of all Australia’s economy continues to grow. The most recent Gross Domestic Product (GDP) figures showed quarterly economic growth of 0.3% and annual growth of 1.7%. However, the annual growth number is at its lowest level since 2009 when the economy shook off the impact of the global financial crisis. So is it fair to ask if the economy has entered a ‘soft patch’?
There are mixed signals of economic activity. Agriculture, mining and public administration are all contributing strongly to the economy. However, construction has come back from high levels and manufacturing continues its long term decline.
On the surface our labour markets appear strong with the unemployment rate at the low level of 5.5%. There has been reasonable growth in full time jobs. Wage growth remains weak however, and sits at its lowest level in more than 15 years. Real wage growth, which takes into account inflation, is actually negative. The annual inflation rate is 2.1% and other measures of inflation suggest little risk of a sharp increase in prices. This leaves a clear path for interest rates to remain low in the medium term.
Consumers are stretched, debt levels are high and savings are low. Consumer confidence has softened a touch and retail sales are at three year lows. Meanwhile the outlook for business is less clear; the data doesn’t provide a positive or negative picture.
Overall the outlook is mixed. Downside risks include the potential for a housing price correction and the associated impact on consumers and banks, and a reduction in mining revenues. Nonetheless interest rates remain at all time lows and there is some room for the Australian dollar to fall should the economy weaken further providing a buffer for our exporters.
So a soft patch it is, but over the long term we expect solid long term growth.
David Bell | Chief Investment Officer