The global financial crisis has caused many investors to question the value of listening to economists. Economists across the globe didn’t warn that a crisis was coming. And of course that includes the supposed experts at the International Monetary Fund as well as the experts at the heart of central banks and governments around the world.
Then there has been the wonderful resilience of the Australian economy that many economists failed to foresee. Australia has managed to avoid recession with the economic expansion now in its 19th year.
The key reason why the experts failed to see the global financial crisis coming is because it turned out to be a domino effect. The US sub-prime mortgage market deteriorated, putting lenders under pressure, then investors in mortgage securities were affected, key financial institutions came under stress, some lenders failed and lending dried up. Financial crises have regularly occurred in the past in individual countries, but – thanks to globalisation – this was the first one to spread across the globe.
While economists can be partly excused for failing to predict the global crisis, there are fewer excuses when it comes to our economy. Many private sector economists became too gloomy on our economy at the height of the crisis, failing to properly weigh up the positive and negative effects. And now some economists have shifted too far the other way, raising the prospect of significant and near-term rate hikes.
Absolved from blame is Australia’s head economist – Reserve Bank governor Glenn Stevens. The Reserve Bank acted decisively to cut interest rates. The governor also quickly identified that Australians had become too gloomy and were at risk of talking themselves into recession. The Federal Government’s advisers – principally Treasury – also deserve credit for recommending the Government’s aggressive stimulus measures.
Investors have plenty of reason to listen to Reserve Bank officials. There is no spin – the advice is always rational and sensible.
The problem for many private sector economists is that they are being used by sales or marketing units to “sell” research views to clients. This causes some to adopt more extreme views to stand out. It causes others to continue to “interpret” economic data in line with their current thinking.
In the past few months we have seen a distinct improvement in the Australian economy, and the Reserve Bank has promptly responded by weighing the evidence and upgrading its views on growth, inflation and interest rates. This analysis has been helped by its extensive liaison program with businesses to get a true reading on the economy. Reserve Bank views are never biased – an approach that private sector economists should seek to emulate in order to win back the confidence of investors.
The week ahead
The national accounts figures were all about looking in the rear view mirror and assessing what shape the economy was in over the April to June period – a period that finished over two months ago. The good news for investors is that data in the coming week will provide a greater sense of where we are now and where we are going.
On Monday job advertisement figures for August are released together with the Performance of Construction index. The National Australia Bank business confidence index is issued on Tuesday. On Wednesday there is a trifecta of retail trade, consumer confidence and housing finance data. And on Thursday the monthly employment figures are released.
The anecdotal evidence is that employers are hiring again. The question is whether this hiring is being reflected in internet and newspaper job ads or whether businesses are filling positions from the resumes sent to them directly or via recruitment consultants. The Olivier and ANZ job ad indexes will answer the question.
The NAB business survey should show that confidence levels are consolidating at higher levels, while also on the cards is another lift in the reading of operating conditions.
Healthy readings are expected for the consumer and housing related data. Retail spending should have lifted by 0.5% in July following the latest cut in personal tax rates. Consumer sentiment probably held close to the near two-year highs in September – there are few reasons for consumers to be glum. And the value of housing loans may have been little-changed in July after nine consecutive months of gains. What the Reserve Bank would like to see is more people looking to build homes, rather than seeking to buy established homes.
The August jobs data is out on Thursday, but it is always important to remember that it is a lagging indicator. While job cuts show up quickly, it can take four to five months for new staff to be hired. Employment may have fallen by 15,000 in August, basically matching the number of people joining the workforce. Overall we expect that the unemployment rate was unchanged at 5.8%. And investors will keep a close eye on the number of hours worked – any improvement is a precursor to an increase in hiring.
The US economic calendar is quiet in the coming week. The Beige Book summary of economic conditions is released on Wednesday with trade on Thursday and consumer sentiment, budget and trade price data on Friday.
From Australia’s perspective the main thing to watch in the coming week is the latest batch of Chinese economic data to be released on Friday.
Sharemarket
No sooner had the calendar clicked over to September, when reports began to flood out about how September was a “bad” month for stocks. Of course the old adage that ‘time in the markets is more important than timing the market’ still holds, but it tends to get lost at this time of year.
Generally, the analysis of monthly sharemarket changes is quite impressive – stretching back 100 years for the US Dow Jones. But a lot has changed over that time. In fact, if you look back over just the past 15 years, the US Dow Jones has fallen only seven times during September. And on all but two occasions when shares fell in September, they were up in October.
The perception that September is a bad month for shares may prove to be self-fulfilling. But that can represent an opportunity for longer-term investors – that is, to pick up shares at lower prices.
Interest rates
The Reserve Bank doesn’t have pre-conceived idea of when to tighten monetary policy. Each month the Board weighs the evidence and determines the best approach. The underlying rationale is always the same – of all the decisions that could be made, what would do least harm for the economy. This is not fool-proof. It involves judgments.
At present it is a case of judging the likelihood of something else going wrong – the Reserve Bank is still worried that financial institutions in the US and Europe are vulnerable. Still, the RBA also doesn’t want to leave rates at 49-year lows for too long, given the risk that underlying inflation may not retreat to the 2-3% target zone. Rate hikes are certainly coming, but the Reserve Bank is still weighing the risks.
Currencies & commodities
The common belief is that September is a “bad” month for stocks. But as indicated above, the results depend on the time period chosen. But while US share prices tend to ease in September, the price of gold tends to rise. The MarketWatch news wire has assessed changes in the gold price over time, finding that prices rose in 16 of the past 20 Septembers. The average gain over this period was 3.4%, but prices have lifted on average by 5% in the last seven Septembers.
In part, the attraction to gold may reflect weaker share prices – in other words, safe-haven flows. But the US dollar also tends to weaken in September, boosting commodity demand. Then there is the influence of buying from India – the world’s largest gold consumer. The post-monsoon ‘wedding season’ is about to begin – a major period of gold buying.
Craig James is chief economist at CommSec.
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
