• Fiona Prior

Economic snippets - October 2018


Inflation, bloody inflation, October 29

Nice article by David Uren today. RBA seems a bit obsessive about the definition of 'Inflation'. Their target is goods and services inflation, actually some elegant variation of CPI inflation. This is the current fashion among central so we mustn't be too critical.

'What about asset inflation', I hear you cry. Share price inflation is dominated by USA share prices, so that out of court for us. 'House price inflation might have been relevant a year or so ago but we got APRA to tighten credit conditions and that fixed that'. ('Indeed we're a bit worried house price deflation may be overdone, and we'll be blamed, so we're lying low'.)

David Uren mentions the Swedish approach, which comes close to my preference, if done with more subtlety.

'Following the GFC, the Swedish central bank cut its benchmark rate to 0.25 per cent, but then lifted it to 2 per cent over 2011 and 2012 as housing prices soared. It was a move dubbed “sado-monetarism” by Nobel-winning economist Paul Krugman.

'Svensson opposed the rate hikes, which were dramatically reversed as the Swedish economy stalled, and taken to negative levels by 2016. Svensson left the bank in 2013, publishing research to substantiate his dissent'.

This debate will rage on, gentle readers, despite the loss of Mr Svensson. More from Mr Uren here.

US equities volatile, 24/10

After a massive one day recovery, last night saw another massive US equity market drop. This volatility is typical of a late cycle change of trend. Take care, gentle readers.

Jobs growing unemployment falls, 18/10

The Australian Bureau of Statistics reported today: 'Australia's seasonally adjusted unemployment rate unexpectedly dropped to 5 percent in September 2018 from 5.3 percent in the previous month while markets estimated 5.3 percent. It was the lowest jobless rate since April 2012, as the economy added 5,600 jobs while the number of unemployed declined by 37,200.'

Please do not forget that the ABS uses ridiculous definition of 'employed'. More correctly measured by Roy Morgan Research, unemployment is around twice the ABS number, though overall unemployment may be falling.

If unemployment is really 'full employment' - ABS 5% is near enough to that - would wages not be growing? The fact it is not confirms the RMR extimate of unemployment is more nearly correct.

US storm clouds gather says the Economist, 15/ 10.

Three problems for the US are; China's economy, where authorities are trying to reduce financial leverage; many other emerging economies are buffeted by rising global interest rates (led by the US Fed's rate rises as well as their own economic imbalances); and President Trump's trade wars., which will hurt China more than the USA. Activity in most developed nations is slowing gently but the USA, like its President, continues to roar.

Share prices tumble, 12/10

A wild week for US and global shares have reminded us all that wealth does not rise forever. Whether this episode is a blip or the start of a bigger downturn is uncertain, though my guess is it is more of a warning than a catastrophe, 'a temporary bout of indigestion', as the Wall Street Journal put it.

RBA Stability Report published, 12/10.

Read the overview here. My summary - pretty relaxed and comfortable.

IMF worries about global economy, 11/10

Wall Street down by over 3 %. Is this the long-awaited (by Henry) correction, or just another blip?

A clue comes today from David Uren of the Oz. Issues from an organisation that failed to predict the GFC include:

* US-China trade war

* Strong credit growth in both countries

* And (Henry adds) strong increase in US interest rates.

Read on here.

Readers may also enjoy a nice discussion of Australian (and WA) economic conditions by RBA economist Merrylin Coombs. (A granddaughter of the original Coombs?)

https://www.rba.gov.au/speeches/2018/sp-so-2018-10-10.html

NAB's team of excellent economists update their economic forecasts as follows, 9/10:

'From a higher base (reflecting revisions to history) we see the following factors as key drivers to the outlook. Public sector demand – both infrastructure spending and consumption through the NDIS – will remain strong, and will probably flow over into quite strong non-mining investment. Mining is a potential upside factor to the forecasts, with that sector now clearly reporting the strongest conditions and confidence.

'At a minimum the drag from falling investment in the mining sector is expected to wane as the last of the LNG mega-projects enter the production phase. It is also likely that there will be some new mining investment as depleted mines are replaced and because a higher level of capex will be required in the future to maintain production - with the now larger capital stock in the sector. The lower currency in an environment where the domestic economy is strong will also help maintain domestic growth momentum.'

Housing price falls increases, especially Sydney and Melbourne, 9/10.

Auction clearance low and getting lower, often houses are sold after a failed auction for less than supposed price needed for auction to succeed.

House and apartment prices falling and in Melbourne rate of fall seems to be increasing.

Jumps and lurches, 4/10

The new month started with a jump in US bond rates and a lurch down in the Aussie dollar. US interest rastes are rising due to strong economic performance and the Donald will soon be complaining as the US Fed begins to tighten US cash interest rates.

Higher US interest rates are helping cause the decline of the Aussie dollar and some folk expect a much lower Aussie exchange rate if the RBA continues to sit on its collective hands. (Easy work if you can get it!)

Mrs T asked me for a 5 year view today. My 50 % guess is as follows: A year or two of good growth with some rise in real wages, at last. Then the continued growth of credit catches up with major countries, including Australia, and the resulting recession could be worse than during the GFC, especially for Australia which will not have a mining boom to tide us over. Please refer to News + Views column opposite.

My 30 % guess: A really horrific crash, with widespread and damaging misery.

My 20 % guess: continued boom lead by a strongly resurgent USA and a triumphant President Trump. Then the inevitable big correction.


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