By Kyle Thompson, Senior Financial Adviser | July 7, 2016
While Australia’s headline real growth rate has remained resilient, the composition reflects an economy that is becoming increasingly imbalanced as it transitions away from mining-led growth. As investment in mining continues to wind down, businesses outside the resource sector, as well as the government, have kept their spending belts relatively tight.
The one balance sheet that is responding to easier monetary conditions, but unfortunately, has the least capacity to do so – is households. The reliance on households and housing for growth have led to an increase in household leverage and house prices from already elevated levels and is creating an uncomfortable imbalance that is unlikely to be sustainable over the long term. Recent reports of cooling property prices across Sydney and Melbourne are a testament to this.
Most recently, new data points suggesting a weakening in the corporate outlook came in the form of softening wage growth. First-quarter wage growth was just 2.1% on a year-over-year basis. Private-sector wage growth was weaker at 1.9% with only three out of 16 industries showing wage growth in excess of 2.5%. Worryingly, wage growth has now fallen by 20 basis points (bps) compared to a year ago and 50 bps from three years ago, indicating a linear downward trend. Concurrent to this trend is the increasing under-employment numbers, suggesting a greater percentage of the current domestic workforce is actively seeking out additional employment opportunities than ever before.
Another recent concerning data point was the decline in inflation expectations, potentially driven by softening wage growth. According to a Melbourne Institute Survey, inflation expectations have fallen to 3.2% on a 12-month horizon. Although still robust in the context of developed markets, this is down from 3.7% since the turn of the year. Reflecting this, in May, the Reserve Bank of Australia’s (RBA) statement of monetary policy (SMP) marked a significant change in its inflation outlook. In a material change, the RBA forecasted that underlying inflation will be 100 bps lower over the course of 2016, compared to their February forecast, and that underlying inflation will remain at the bottom of their target range until mid-2018.
Slowing wage growth along with the declining inflation outlook prompted the RBA to cut the cash rate by 25 bps to a record low of 1.75% at its May meeting, the first anniversary of its last rate cut. This is unlikely to be the last rate cut when viewed in the context of soft wage growth, high levels of underutilized labor, declining labor participation, fewer aggregate hours worked (particularly for full-time employees), and slowing employment momentum spreading from the western states with high exposure to resources to the eastern seaboard states. In doing so, the RBA will be in esteemed company with other global central banks waging war on sluggish growth through monetary channels.
In light of these changing dynamics, the recent election, and to top it all off, Brexit, we continue to look forward, focus on the opportunities, and seek to control those variables we can actively influence. We’re continuing to spend a lot of time with our clients focused on debt restructuring, debt repayment, and tax minimisation. As always, strategic asset allocation remains crucial during these periods and we continue to position our portfolios in a forward-looking manner accordingly. As corporate earnings pressures increase we continue to seek out opportunities to invest in companies focused on delivering an incremental return on equity, rather than paying out profits to the detriment of future capital growth.
If it’s been some time since you reviewed your current arrangements, we’d encourage you to get in contact today.
This article is for general information purposes only. It has been prepared without considering your objectives, financial situation or needs. You should, before acting on the information, consider its appropriateness to your circumstances.
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