Wealth Managed – 7 September 2016

By David Lane - September 8, 2016

A quarter of a century of uninterrupted growth, interest rates are stable and the share market is buoyant . . . everything is positive, right? Looking below the headlines tells a slightly less optimistic story.

Australia’s GDP release today has shown that the economy grew by 0.5% in the second quarter, taking the annual growth rate to a four-year high of 3.3%.  We have not seen growth rates as strong since the decline of the mining boom.  Mining investment is still falling significantly (-7.4% for the quarter).  Net trade fell by 0.2%.

Consumption growth increased by only 0.4% compared to 0.8% in the previous period.  With low wages growth, this is a concern and we hope that this slowing is not the beginning of a longer term trend.
So where is our economic growth coming from?  Government.  Government consumption increased by 1.9% in the second quarter, with public investment increasing by a massive 15.5%.  In total, the public sector added 1% to quarterly GDP and 1.2% to the annual number.

Coming out of the Federal Election campaign, and with reasonably tight fiscal measures in the budget, it is unlikely to expect that government spending will continue to prop up the GDP.  Business investment is required to add to provide sustained long term growth.

Although the August reporting season was largely seen as being reasonable, with the absence of a large number of negative shocks, a notable feature of the listed company reports was the lack of anticipated investment in future growth.  Outlook statements from the majority of companies were muted, with many citing challenging conditions in the year ahead.  While there were some exceptions, management appeared to be setting expectations for low growth in the year ahead.

Glenn Stevens has completed his 10 year term as RBA Governor by announcing that interest rates will remain at 1.5%.  Following Mr Steven’s 110th meeting as Governor – through some extremely challenging times – he has passed the reigns onto Phillip Lowe.  Across his tenure, the official cash rate has declined from 6% to 1.5%, and was as high a 7.25% from March to September 2008.

Source: FactSet

The statement accompanying Glenn Steven’s final board meeting indicated that the RBA has, at least at the current time, come to the conclusion that they have done all in their power to support the economy. Taking a global perspective, it seems clear that accommodative monetary policy has not been enough to stimulate growth. Fiscal stimulus, combined with business investment, is what is required.

While the Governor of the RBA, Mr Lowe, does has some armoury left, it is now Malcolm Turnbull, Scott Morrison and Australia’s business leaders that need to provide the platform for economic growth.

News in Review 

  • The US added 151,000 jobs in August, below economists’ forecasts for 180,000 and a marked slowdown after two bumper months of growth. Figures from the Department of Labor also showed wage growth slowed and the unemployment rate remained steady at 4.9%, defying expectations for it to edge down.
  • Australia’s retail sales were flat in July, lowering the annual growth to 2.9% and continuing the weak momentum seen in 2016. The outcome was primarily driven by weak department store sales and casts doubt over the perceived strength of household consumption.
  • Australia’s booming housing market showed signs of easing, with the latest Housing Industry Survey indicating a 9.7% slump in sales in July, entirely reversing the 8.2% gain from June. While extremely volatile due to the impact of higher density housing sales, the total number of sales recorded in July was the lowest seen since July 2014. 
  • India's gross domestic product in the June quarter slowed to 7.1% from 7.5% in the same period last year due to lower activity in farm, mining and construction sectors. The slowdown makes the government’s target of 8% growth this year less likely, however recent monsoon rains following two years of drought is expected to significantly boost growth in the remaining quarters of 2016.
  • The European Commission’s economic sentiment index fell to 103.5 in August, which is the lowest level since March and and suggesting that Britain’s vote to leave the EU may be starting to hit sentiment across the bloc and suggesting that Britain’s vote to leave the EU may be starting to hit sentiment across the euro region. Confidence was down in four of the Eurozone's five largest economies, with France the only exception where the index rose moderately.
  • China’s consumer confidence index fell 2.5 points to 111.5 in August, which was the lowest reading since February and just marginally above last year’s historic low. While a figure above 100 indicates that there are presently more optimists than pessimists, there has however never been a sub-100 reading in the history of the survey dating back to 2007.
  • US Consumer spending rose for the fourth straight month in July, a sign that domestic consumption could continue to drive U.S. economic growth over the second half of 2016. The robust spending over the past four months may signal to firms to replenish their stockrooms, which could spur new manufacturing activity and boost growth in the short term.
  • The US ISM Manufacturing PMI fell back into contractionary territory at 49.4 in August from 52.6, its lowest level since February. The decline stands in contrast to recent hawkish US Fed commentary and is likely to reduce the probability of a September rate hike given the implied job losses.
  • Dilma Rousseff was formally impeached by the senate as President of Brazil for manipulating the budget. Her removal puts an end to the 13 years in power of her left-wing Workers' Party. Michel Temer was sworn in as president and will serve out Ms Rousseff's term until 1 January 2019. 

Company News

  • Australia's second biggest fixed-line internet provider TPG Telecom made the first move toward becoming Singapore's fourth mobile communications operator by submitting the necessary expression of interest to take part in the bidding process for mobile spectrum.
  • Apple chief Tim Cook slammed a European Commission ruling demanding the US tech giant pay Ireland €13 billion in back-taxes as "political crap", urging the Irish government to launch an appeal.
  • Aurizon appointed Andrew Harding as chief executive in place of Lance Hockridge, calling the former Rio Tinto iron ore head the right person to increase value for shareholders.
  • Ratings agency Moody's says plans by David Jones to expand its premium food selection are credit negative for Woolworths and Wesfarmers owned Coles, as it could weaken their market share.

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