We are back at one of those interesting junctures where the anecdotal evidence doesn’t match up with the economic data. Small businesses say that they are doing it tough. Listed companies weren’t prepared to provide guidance statements in the recent profit-reporting season, saying that the outlook was too uncertain. But the latest batch of economic data suggests that the Australian economy is actually doing fine. Not boom time as such, but certainly tracking in line with what would be considered “normal”.
Can both be right? The answer is that they can – up to a point. But there are timing issues involved as well as differences across industries and regions.
Take for instance the GDP data. To get a handle on the states and territories you need to look at final demand (effectively consumption and investment) and then add on the trade performance, because that is a key growth driver in many states. What the data shows is that the Western Australian economy grew by 9.2% over the past year while the ACT economy was up 11.3 percent and South Australia was up 4.0%. These economies were ranked 1, 2 and 3 in our last State of the States report so it makes sense. But Queensland was up just 0.8% over the year with NSW up 2.4%. They ranked equal 7th in our report, so again it is little surprise. But it shows vast regional differences.
Then there is the composition of growth. Household spending added 0.9 percentage points to the 1.2% lift in GDP and dwelling investment added 0.3 percentage points. The lift in dwelling investment was a case of last year’s stimulus at work. Last year’s first home buyers grant and rate cuts boosted demand for new homes with many of those new dwellings completed in the June quarter. Again the lift in household consumption shows the stimulus at work. Small and medium-size businesses ordered new vehicles late last year in response to the government’s tax incentive. And those vehicles were delivered over the first half of 2010.
The tax break is over so the same boost to household spending won’t occur in the current quarter. In fact car sales, rent and insurance accounted for half the growth in household spending in the June quarter so you can understand why most retailers are rubbing their eyes in disbelief at reports of a so-called spending spree.
But didn’t retail trade lift 0.7% in July? Yes, but all the growth was contributed by cafes and restaurants. Again, it looks a little suspicious. The MasterChef effect? Perhaps.
That doesn’t mean that the economy is set to stall, it’s just that some of the super-positive reports on the economy have been overdone. We expect that consumer spending will pick up in response to a strong job market, record wealth levels and attractive pricing, but only in response to stable interest rates, and with a healthy dose of conservatism being maintained by consumers.
It may not be in the same ball park as what we have recently witnessed, but there is still a healthy level of economic data releases over the coming week with a Reserve Bank Board meeting thrown in for good measure.
On Monday both Advantage and ANZ release job advertisement figures while TD Securities and the Melbourne Institute issue their August inflation gauge. The Reserve Bank Board meets on Tuesday with housing finance to follow on Wednesday and the monthly jobs report to be released on Thursday. Reserve Bank Assistant Governor Guy Debelle also delivers a speech on Thursday.
Tackling the Reserve Bank Board meeting first, we expect rates to remain unchanged. The Reserve Bank will no doubt indicate that our economy is doing fine, but it will also acknowledge the uncertainties abroad. While there is a risk rates could rise late in the year, for now at least the Reserve Bank has no work to do.
Turning to the data, in July there were mixed readings on job advertisements with the Advantage index down 1.3% and the ANZ index up 1.3%. But the bottom line was that readings were softer than in previous months so the August data will be watched closely. And the latest inflation gauge showed that inflationary pressures were well in check with July with prices up just 0.1%.
Another indicator that has recently softened is home loans, with the June reading at 9-year lows. We’re not expecting much improvement in July with loans up 1%, suggesting that the housing market is finding it difficult to find momentum at present.
Finally the August job report is released on Thursday. In July the unemployment rate surprised, lifting from 5.1% to 5.3%. Employment still rose by 23,500 but the job gains were all part-time staff. We tip a 20,000 lift in jobs in August, a result just high enough to absorb new entrants to the market. As a result the jobless rate is expected to be unchanged at 5.3%.
In the US, investors will be scratching around for indicators to provide direction in the coming week. After a holiday on Monday, the only data of note is the Federal Reserve Beige Book on Wednesday with weekly jobless claims and the trade report on Thursday.
The Beige Book is a qualitative (as opposed to a quantitative) assessment of economic conditions across Federal Reserve districts. With bulls and bears evenly divided on prospects for a ‘double dip’ recession in the US, investors will be combing the report closely for fresh clues.
And the trade balance doesn’t usually have a big influence on financial markets, that is, unless it jumps sharply like last month. Economists expect that the trade deficit narrowed from US$49.9 billion to US$48.3 billion in July.
The other event of note in the coming week is the first batch of Chinese economic data on Friday. Readings on trade and property prices are expected and possibly lending and money supply. The remainder of the data is released on September 13.
While you can’t always rely on share prices rising over time – producing capital gains on your investments – it is a different story when it comes to dividends. Over the past 15 years the average dividend yield on the All Ordinaries has averaged 3.90% and encouragingly the current yield of 3.81% is not far off this long-term average. The worst you could have done over the period is to have secured a yield of 2.20% while the best time to have picked up shares was January 2009 when yields hit an all-time high of 6.85%. Clearly some stocks focus more on the dividend than capital return with utilities and telecoms dominating the list.
One of the highest dividends on offer at present is from Telstra with the dividend yield sitting at 10% – a potential attraction for long-term investors. It is actually interesting to track the returns for those people who invested in the initial T1 offer at $3.30 a share in November 1997. Over that time Telstra has paid dividends of $3.45, which combined with the current share price equates to total returns of 90% over the 13 year period.
The ‘Spring Tsunami’ of economic data is largely out of the road, so what did financial markets make of it? In other words, was the data strong enough to change perceptions about where rates are headed? In short, no. The overnight index swap market sees only a slight chance of rates rising over the coming year. The one-year OIS stands at 4.5575%, just above the current cash rate of 4.50%. What about the short term outlook? The chance of a rate hike next week is put at -8. In other words there is more chance of a rate cut than a rate hike. And the implied yield on December 90-day bank bill futures stands at 4.73%, exactly in line with the current physical yield. We think this is a rational view about where rates are headed. While the risks are skewed in favour of rates going up, the Reserve Bank has no fundamental reason to be changing rates in the short term.
The Reserve Bank index of commodity prices hit record highs in currency-neutral SDR terms in August. While the strong gains over the past year have been largely driven by coal, iron ore and gold, rural commodity prices have also lifted sharply. Over the past year rural commodity prices have risen 21% in SDR terms and 17.6% in US dollar terms. Wheat has been the star performer, up 44%, with beef up 26%.
Craig James is chief economist at CommSec.
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