Since the inception of this wonderful publication, I have not attempted to impose my economic nor my market views upon the readership. However, with the Reserve Bank at long last seeing what was obvious to others – though not to many economists – it is time for some prognostications. For those who know me through my media activities, in a former life I lectured economics at the University of New South Wales, where I worked for almost 14 years. I have the utmost respect for economists, especially the banking ones, who have to put their forecasts and long-term views on the line for media consumption.
Because I don’t have time to do the hard work of number crunching, I am deeply in their debt for knowing what the latest economic reading is from the likes of the Australian Bureau of Statistics, the Melbourne Institute, various banks, et cetera. That said, it would be an avoidance of the truth if I didn’t note that some of my colleagues’ interpretation of the economic readings they have been provided with has been pretty poor.
The latest National Accounts figures, especially the economic growth numbers, easily prove the point. I must confess, I jumped in pretty early questioning the value of the RBA’s interest rate rises, but as soon as the banks joined the “party” with additional increases, you would have thought the penny would have dropped that the Aussie consumer’s hip pocket was being flogged. All readings of consumer confidence and business confidence have been terrible for months. In March, Christena Singh of Sensis said the consumer confidence indicator plummeted 17 percentage points between November 2007 and February 2008, from 61 per cent to 44 per cent.
“This is the largest one-quarter fall we have on record,” she said. “It is also the lowest level of consumer confidence since May 2006, when confidence was one percentage point lower at 43 per cent.” The causes were simple. “Rising interest rates are the key reason Australians are worried about their financial prospects,” Singh pointed out. “In fact, rising prices, including interest rates and the cost of living generally, are the reasons given by seven out of every 10 people who are worried.”
Small business surveys have been telling a similar story since November last year. Then, the Sensis business confidence indicator had fallen 16 percentage points during the preceding three months, to 43 per cent, the lowest level in six years. “We have never seen such a dramatic one-quarter fall in confidence in the 14 years Sensis has been tracking small businesses,” Ms Singh said. “And this takes business confidence to the lowest we’ve seen in six years.” The trouble is that most forecasters don’t look at these sorts of surveys of small business, despite the importance of the sector to GDP.
Worried by these surveys, I seized on a strange figure before the May Budget, put out by the Reserve Bank, tipping that non-farm GDP would rise by only 1.75 per cent for the 2007/08 financial year. If that was right, and given mining’s growth would be in that number, the rest of the economy would have to be pretty weak. Now we have seen the last quarter of the 2007/08 year come in at 0.3 per cent growth. In Australia, we add this to the other three quarters before, and say our annual growth is 2.7 per cent, but there’s a lot of old news in that number. In America, they would take 0.3 per cent and multiply it by four and say we’ve got a 1.2 per cent growing economy. This gives you a better here and now feel.
Economists who were tipping the first rate cut would be in the early months of 2009 now think we will see three more rate cuts by the middle of next year. This is more realistic as the global economy slows faster than expected. The calibre of the cuts will determine whether we end up in recession or not. I think we can avoid the “R” word, but it could be a close run thing. For those looking for hope, that doyen of economists, Don Stammer, appeared on my Money Makers program on Sky Business, and did what we’re always told never happens – he rang the bell to signify the bear market was over!
He thought the low was on July 15 when the S&P/ASX 200 hit a low of 4815 points – it was a gutsy call. We all know he could be wrong, and by the time this gets to print he might already have egg on his face. However, it’s always coldest just before the sunrise and a lot of things are going in the right direction now. Inflation is falling. Oil is giving into gravity and so are interest rates. Those of us who like greatquality companies at very low P/Es should be gaining the confidence to give in to our gut instincts.