Monthly economic e-news – July 2019

15 July 2019

By Craig Turnbull  
Chief Investment Officer.


Share markets up this year despite a gloomy outlook

Over the last six months, share markets continued their upward march despite the ongoing US/China trade war and an increasingly pessimistic outlook for the global and the local economy.

Many Australians topping up their super before the end of the financial year helped the ASX 200 reach 6,618 points by the end of June. Add in dividends and despite the volatility, the Australian share market rewarded investors with double-digit returns over the past 12 months.

But there are fears that share prices could eventually be eroded by a weakening economy.

 

Source: Yahoo Finance  

What are the main concerns with the local economy?

It’s been widely reported that Australia’s seasonally-adjusted annual GDP growth rate has been steadily falling for some time; down from 3% in early 2018 to 1.8% by March 2019.

Mining exports and government spending have been propping up the economy but household consumption and business investment remain weak.

Household consumption accounts for more than half of Australia’s GDP but the annual growth in retail trade declined from 3.5% in September 2018 to just 2.7% in May 2019.

Business investment is a key growth factor but according to the Australian Bureau of Statistics (ABS), private sector capital expenditure (CAPEX) fell 1.7% in the March quarter and 1.9% over the previous twelve months.

Most concerning is that CAPEX has been falling across all sectors of the economy including manufacturing, mining and the services industry, and that is not good news for our economic growth over the short to medium term.

Are interest rate and tax cuts enough to stimulate the economy?

Most commentators agree that rate cuts alone will not revive our growth rate.

Australian households’ average debt-to-income ratio is closing in on 200%, the highest in the developed world, so it’s expected that many people will use the rate cuts to reduce debt rather than increase their spending.

However, the recent rise in auction clearance rates in Sydney and Melbourne suggests that the lower rates may be enticing more people back into the residential property market. While this may increase household debt it may also boost spending on consumer goods such as furniture and appliances.

Low interest rates should encourage businesses to borrow and invest but the latest NAB Business Survey revealed that after a post-election bounce, business confidence fell back in June, and forward orders remain below the long-term average.

In July, the federal parliament passed the Government’s tax package giving many workers an immediate tax rebate with more cuts to come over the next six years.

It’s expected that the rebates will boost consumer spending in the short term, but it’s likely that many others will again take the opportunity to reduce their debts.

So while the rate cuts and the tax cuts may provide some relief, it’s evident that more needs to be done to boost investment and wage growth across the economy.

So what can be done to spark more growth?

The Governor of the Reserve Bank, Philip Lowe, has been advocating that federal and state governments should take advantage of historically low interest rates to borrow more and invest in key infrastructure projects.

The federal government, however, was re-elected on a promise of returning the budget to surplus and any large-scale borrowing may carry too much political risk.

Nevertheless, the government may ultimately have no choice but to do what it takes to stimulate a spluttering economy.

 

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Markets at a glance

for the month ending 30 June 2019

Australian shares1 up by 3.70% 

 Australian Government Bonds yield2 down to 1.320%

Australian dollar up to US$0.7013

Cash rate3down to 1.25%* 

 International shares4 up by 6.49%

* RBA reduced the official cash rate to 1.00% on 2 July 2019

1 ASX 200 Accumulation Index
2 Yield on 10 year Australian Government Bonds
3 RBA cash rate
4 MSCI – World ex Australia (USD)

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