The Australian Economy is not bad | Dr. Shane Oliver

Dr. Shane Oliver, Head of Investment Strategy and Chief Economist at AMP Capital reported on how the Australian economy is fairing in his latest update.

And while our economy is facing some challenges and slowing a little, Oliver believes the broad outlook is positive.

Here’s what he had to say;

Soft June quarter GDP, but outlook O.K.

The slowdown in June quarter GDP growth to just 0.5% quarter on quarter, or just 2% on a US style annualised basis, against the backdrop of weak commodity prices, the end of the mining investment boom and rising unemployment may add to consternation regarding the Australian economic outlook.AMP-chief-economist-Dr-Shane-Oliver

The slowdown in economic growth seen in June quarter may add to concerns about the economy.

Particularly so with Australian Bureau of Statistics (ABS) business investment intentions data pointing to a fall in business investment this financial year of 9 to 10%.

However, the broad outlook remains for a gradual improvement in growth.

The poor GDP growth seen in the June quarter is pay back for the much stronger than expected 1.1% rise seen in the March quarter.

This reflected noise in the timing of exports and imports such that trade boosted growth by 1.4 percentage points in the March quarter and detracted 0.9 percentage points in the June quarter.

Given this it makes sense to average the two quarters giving average quarterly growth of 0.8%, or 3.2% annualised, which is actually pretty good.

Of course, spending growth averaged over the two quarters is just 2.2% annualised which is hardly great.

However, signs continue to mount that thanks to the fall in interest rates to record lows and to a lesser degree the lower $A, the economy is rebalancing towards more broad based growth.

  • A housing construction boom is now underway with home building up 8.6% over the last year and more on the way.

Building approvals are about as strong as they ever get

Source: Bloomberg, AMP Capital

  • Business confidence has risen to solid levels and while consumer confidence took a hit from the Budget cutbacks scare, it seems to be clawing its way back up.

The Australian Economy is not bad | Dr. Shane Oliver

Source: Bloomberg, AMP Capital

  • A range of forward looking labour market indicators – ANZ and SEEK job ads, skilled vacancies and the NAB business survey are pointing up for jobs.

Business confidence leading consumer confidence up

Source: ABS, NAB, AMP Capital

  • Lower interest rates, rising wealth levels and rising housing construction is likely to drive a pick-up in retail sales with household equipment leading the charge.
  • While the investment outlook for mining and manufacturing is bleak the outlook for investment in other industries is improving.
    Investment intentions for what the ABS calls “other selected industries” points to a 9% to 10% gain this financial year.
    And the NAB business survey’s investment intentions index has actually started to rise pointing to stronger investment ahead.

NAB survey points to improving capex

Source: ABS, NAB, AMP Capital

  • Finally, we are also coming into the third and final phase of the resources boom. We will see increased export volumes as projects complete and reduced capital goods imports as resource investment slows.

Drawing these factors together our assessment remains that underlying demand and growth in Australia is gradually on the mend and should be running around trend of just above 3% through next year.

Not “dog days”

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The key to the Australian economy right now is rebalancing.

The mining investment boom and associated surge in interest rates and in the $A that were necessary to make way for it, led to a dramatically imbalanced economy with half of growth coming from mining investment at one point.

This clearly adversely affected big parts of the non-mining economy.

With mining investment now fading, lower interest rates and in time further declines in the $A are allowing the non-mining economy to bounce back.

This process is slow – and it would be aided by a reinvigorated economic reform agenda – but the indicators above suggest it’s underway.

Implications for investors

First, the outlook for the economy is not nearly as gloomy as frequent headlines suggest. Profits are likely to record modest but reasonable growth over year ahead.

Second, interest rates are likely to remain on hold. Growth is not bad enough and there are enough signs rate cuts are working to argue against rate cuts.

But the high level of uncertainty regarding the economic outlook, the still too high $A and low inflation argue against rate hikes. The most likely outcome is that rates will be on hold well into next year.

Finally, the combination of rising economic growth and continuing low interest rates should underpin a pick-up in non-resources earnings growth over the year ahead, which in turn should support further gains in the Australian share market.

Our year-end target for the ASX 200 remains 5800.


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