Précis of Oliver's Insights (adapted from the original) 6 September 2017 by Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital. See the full article.
Growth bounces back (again)
After a soft patch in the March quarter, Australian economic growth bounced back in the June quarter but annual growth is still subdued at 1.8% year on year. Though Australia continues to defy the doomsters’ endless recession calls.
Australia's threat, risk and worry list
- Housing construction is starting to slow with falling approvals pointing to a further slowing.
- Risk of a house price slowdown in Sydney and Melbourne. However, there have been endless property crash calls since around 2004.
- Consumer spending is low due to record low wages growth and high levels of underemployment.
- Mining investment is still falling with business investment intentions pointing to another 22% fall this financial year.
- The Australian dollar is up 16% from last year’s low and at around $US0.80 (and threatening to go higher).
- Underlying inflation is too low.
Five reasons to expect growth to improve
Despite these worries, we still believe that recession will be avoided and growth will pick up over the year ahead:
1. The growth drag from falling mining investment is nearly over
2. Non-mining investment is likely to rise this year. Despite a decline in business investment this year of around 3.5% it’s the best it’s been since 2013
3. Public investment is rising strongly, up 14.7% over the last year, reflecting state infrastructure spending.
4. Net exports are likely to continue adding to growth as the completion of resources projects boosts mining and energy export volumes and services sectors like tourism and higher education remain strong.
5. Profits for listed companies are rising again which is a positive for investment and the flow of dividends helps household incomes.
These considerations should ensure that the Australian economy continues to avoid recession and that growth will pick up to around a 2.5% to 3% pace over the year ahead. This should be enough to head off further cuts in the cash rate.
With growth is still a bit below RBA forecasts, wages growth likely to pick up only slowly, inflation likely to remain and the RBA likely wanting to avoid pushing the $A higher, our view remains that the RBA will keep the cash rate unchanged at 1.5% out to the December quarter 2018 before starting to raise rates.
What it means for investors
- A return to reasonable growth is positive for growth assets. Australian shares are vulnerable to a short term US-led share market correction – given North Korean and Trump risks – but we remain of the view that it will be higher by year end.
- Bank deposits are likely to provide poor returns for investors for a while yet, highlighting the case for yield-focussed investors to continue to look for superior sources of yield. The yield gap between Australian shares and bank deposits remains wide, driving a strong source of demand for shares.
- While Australian shares are great for income, global shares are likely to remain outperformers for capital growth.
Dr Shane Oliver
Head of Investment Strategy and Chief Economist