Précis of Oliver’s Insights 2 March 2017 by Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital
We've heard predictions of a recession in Australia over the last few years; with some saying an imminent recession was “unavoidable”. Those fears intensified after the September quarter GDP data showed the economy going backwards. But a 1.1% rebound in December quarter growth highlights that yet again it hasn't happened. This rebound was on the back of stronger consumer spending, housing investment, business investment, public demand and export volumes. So where to from here?
- Australia is on track to take out the Netherland's record of 103 quarters without a recession. The benefits of the economic reforms of the 1980s and 1990s made the economy more flexible, and sensible macro-economic management meant that when the mining boom ended, other sectors of the economy could take over in driving growth.
- Reflecting this, the south eastern states of NSW, Victoria and ACT are continuing to perform strongly.
- Mining investment is now a smaller share of the economy, so its decline is having a diminishing impact and it's nearing the bottom anyway.
- We're continuing to benefit from the third phase of last decade's mining boom which is the surge in resource export volumes as new projects complete – notably gas projects this year.
- Prices for iron ore, metals and energy have rebounded. Among other things, this along with booming export volumes, is leading to a dramatic shrinkage in Australia's current account deficit which could soon be in surplus for the first time since the 1970s.
- Public infrastructure investment is ramping up strongly, in response to state infrastructure spending particularly in NSW and the ACT.
- There are signs of life in non-mining investment. Plans for non-mining investment are actually up 7%.
Overall, recession is likely to continue to be avoided and economic growth is likely on its way back to near 3% this year.
Interest rates on hold
There's a case for another RBA interest rate cut: A high $A coupled with slowing housing investment, and falling mining investment suggests slower economic growth. Yet, growth has bounced back nicely in the December quarter, national income is up and RBA concerns about the threat to household financial stability imply a high hurdle to cutting rates again. So, we now expect rates to be on hold this year.
Profit growth goes back to positive
The Australian December half profit reporting season confirmed a very strong return to profit growth. However, this dramatic turnaround has been driven by resources stocks, with more modest growth for the rest of the market. Further, 80% of companies increased or maintained their dividends and the number of companies seeing earnings upgrades have been higher than normal – both positive signs of corporate confidence.
Implications for investors
A return to reasonable growth underpinning reasonable profit growth is positive for Australian assets.
With Australian shares up 12% since the US election and trading on a forward price to earnings multiple of 15.5 times (which is above the long term average), the market is vulnerable to a further short term consolidation or correction.
However, the improvement in profits – which is likely to broaden to industrials – should underpin a rising trend in the market on a 6-12 month horizon.
Dr Shane Oliver
Head of Investment Strategy and Chief Economist