In this video, Shane Oliver, Chief Economist and Head of Investment Strategy at AMP Capital provides and update on the Australian economy, discusses some opportunities in the current environment and shares some tips for investors going into the end-of-financial year.
The Australian economy is growing, albeit slowly
Despite numerous forecasts for recession following the end of the mining boom early this decade, the Australian economy has continued to grow. However, recently it seems to have hit a rough patch. Cyclone Debbie and its aftermath disrupted housing construction and trade in the March-quarter and the weather impact on trade will worsen – as indicated by a 45% collapse in coal exports in April. Overall, March-quarter growth was just 0.3% quarter-on-quarter and annual growth slowed to 1.7% year-on-year, its slowest since the global financial crisis (GFC).
- Consumer spending is heavily constrained by record low wages growth and high levels of underemployment, affecting consumer confidence
- Slowing housing cycle with a downtrend in housing construction activity and a likely peak in Sydney and Melbourne property price growth under the weight of bank rate hikes, tighter lending standards, rising supply and poor affordability.
- Drag from falling mining investment is close to the bottom: While mining investment is still falling rapidly, currently around 2% of GDP, its weight in the economy has collapsed reducing its drag on growth to around 0.5% for the year ahead.
- Public infrastructure investment is strong, up 9.5% over the last year, in response to state infrastructure spending financed predominately from the privatisation of existing public assets.
- Net exports and trade are expected to contribute to growth as the impact of Cyclone Debbie fades, resource projects for gas complete and services exports continue to strengthen.
Will the RBA cut rates?
The chance of an interest rate hike in the next 12-months is very low and the probability of another rate cut is around 40-50% with the Reserve Bank of Australia (RBA) remaining reluctant to cut rates again. Key things to watch include a softening in jobs data; continued weak consumer spending; another downwards revision in RBA growth and inflation forecasts; significant cooling in the Sydney and Melbourne property markets; and the Australian dollar remaining relatively resilient.
Tips for investors
In the current market environment, Australian-based investors should consider:
- Global over Australian shares: While US and global share indices are hitting new record highs, Australian shares remain well below their pre-GFC peak. In fact, Australian shares have been underperforming global shares since October 2009. This reflects relatively tighter monetary policy in Australia, the commodity slump, the lagged impact of the rise in the Australian dollar above parity in 2010 and a mean reversion of the 2000 to 2009 outperformance by Australian shares. We see the ASX200 trending higher by year-end, but global shares are likely to do better.
- Exposure to foreign currency: A simple way to maintain a decent exposure to foreign currency is to leave a proportion of global shares unhedged. Historically, the Australian dollar has tended to fall against the US dollar when the level of interest rates in Australia relative to the US is falling. With the US Federal reserve likely to continue (gradually) raising rates and the RBA on hold or potentially cutting rates again, there is downside risk for the Australian dollar.
Annual Australian growth slowed to 1.7% in the March quarter hit by bad weather and weak consumer spending. A declining drag from falling mining investment, strong public infrastructure spending and a likely resumption of trade contributing to growth should all help keep Australia out of recession.
However, soft consumer spending and a slowing in the housing cycle will act to constrain growth to below and government forecasts. As such, there is far more chance of another RBA rate cut than a hike over the next year. Australian shares will likely be higher by year-end but global shares are likely to continue outperforming.