June 2019 Economic Update – “Basking in the post-election sun”

The NAB monthly business survey for May taken just after the election saw business confidence rise to a 10-month high. Consumers were less euphoric with consumer confidence rising in May as they basked in the post-election sun but retreating again in June to readings close to long-term averages. 

The quarterly national accounts released on June 5^th showed economic growth slowed to its lowest level in 9½ years in the March quarter. Again, the main negative was slower consumer spending possibly heightened by the election uncertainty and a decline in dwelling investment.  Key positive contributors to economic growth for the quarter were government consumption expenditure and net exports.

In response to the slowing economy the reserve bank decided to cut the cash rate after 33 months on hold by 25 basis points to 1.25 per cent this month, with the stated intention of supporting continued employment growth, household consumption and the achievement of their inflation target which is persisting below the preferred range. 

As discussed last month one of the most positive indicators is continued strong employment growth and rising participation rates in the USA, Japan, the Euro zone and Australia.

In Australia the latest monthly read on employment for May (released June 13^th) was cause for renewed optimism and showed trend employment increased by 2.7 percent compared to the long-term average of 2.0 percent over the past 20 years. The trend labour force participation rate reached an all-time high of 65.9% and the participation rate for persons aged 15-64 reached a record of 78.4%.  In short, the proportion of the population that want to work and are working is higher than ever before. 

The trend unemployment rate remained unchanged at 5.2% for the third consecutive month. Unemployment fell in Victoria, New South Wales, Queensland and WA and increased in South Australia, Tasmania and the NT and ACT.  The only negative was a slight uptick in the rate of underemployment which increased 0.1pts to 8.5%.

Another positive read on the economy released this month was the Australian Bureau of Statistics quarterly Business Indicator survey for the March quarter which tracks the sales and profitability of Australian business.  Company operating profits rose for the seventh straight quarter to March and profits were up 7.8% year on year.  In rolling annual terms profits were up 10.4% for the year to March.  Mining was the standout with operating profits in rolling annual terms up 23.6% to March.  (see chart)

One reason for the conflicting and contradictory indicators on the state of the economy and consumer confidence is the diverging performance across sectors over the last 12 months. Retailing vs mining is a case in point.  Retailing is now in recession, a combination of weak consumer spending, continued price deflation and an intensely competitive operating environment. Pure play bricks and mortar retailers are struggling in the face of the ongoing shift to online shopping and rising global competition. Conversely, mining exports and profits are at record highs.  Our export performance driven largely by mining commodities (iron ore, coal and gas) stands in sharp contrast to the rest of the world where volumes particularly of industrial goods are falling.

The global economy also continues to deliver mixed messages befuddling economic models and their creators the world over.  In the USA the latest real annualised GDP figure for the March quarter was 3.1% vs 2.2% in the December quarter and was above its long-term trend. Unemployment remains at record lows.  In contrast to Australia the main positive contributor to growth was consumer spending while the main negative was softer corporate profits. That said the Federal reserve has become more dovish as concern over the ongoing trade dispute with China widens.  Many believe the Federal Reserve will cut rates in the US later this week as insurance to stay ahead of any downturn triggered by declining trade volumes and rising uncertainty. China has indicated it will also adjust policy settings as required to keep economic growth within their targeted range which is generally considered to be above 6%. The Eurozone continues to muddle through with slowing industrial growth and exports offset in part by low unemployment and employment growth supporting domestic demand. Any Brexit resolution continues to be kicked down the road with the next deadline postponed to late October.

The post-election shine has started to dim, and interest rate increases locally and globally are firmly off the agenda. In relative terms this is likely to be a negative for credit markets and a positive for share markets in the short to medium term.  On balance Australia appears poised the continue its record-breaking period of recession free growth albeit at lower levels supported by interest rate cuts, tax cuts, a lower dollar and the easing of APRA restraints on bank lending.

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Sources:  Commbank Global Markets Research, RBA, Morningstar.