Get ASX Price
LATEST FINANCIAL PLANNING NEWS
Hot Issues
What happened to all the worries about rising inflation and bond yields? Goldilocks, tariffs, Turkey & other things
Is it better to buy an investment property or home first?
Nine keys to successful investing
This information will turn you into a fireside expert.
How Australians will use their tax return
Lessons from the blue zones: secrets of a long life
Trumponomics and investment markets
Tools for budgeting, cash flow, Super and more ….
How tax deductible personal super contributions work
How much super should I have at my age?
The rise of the gig economy and side gigs (thanks to technology)
Statistics for all Australians
Watch out for tax scams
Now’s the time for tax planning
After the Australian household debt and east coast housing booms
Why it pays to contribute to your partner's super
Australia by numbers – Update
How to deal with financial stress – nearly 1 in 3 affected
Federal Budget 2018 – Overview
Your Budget
4 components of our 2018 Federal Budget
US China trade war fears – Q & A
Tools to help you manage your financial position are available on our site.
7 ways to boost your super
Australians reveal their priority goals
Australia by numbers – Update
Your retirement questions answered
How to make money by turning your unwanted goods into cash
Our website is really our digital office.
Bitcoin – is it really for you?
Spread your money, reduce risk
Love and money? It’s not about control
The pullback in shares - seven reasons not to be too concerned
Australia. All you need to know to be the expert.
Australian’s love affair with debt - how big is the risk?
5 ways to keep a cool head in a falling share market
2018 – a list of lists regarding the macro investment outlook
Sports lovers enjoy better financial fitness
Where Australia is at. Our leading indicators.
The year that was and the year ahead
Add some extra cash to your New Year
New year, new financial resolutions
Our Advent calendar for 2017
Where are we in the global investment cycle?
Australia's vital statistics
12 ways to enjoy summer without spending a fortune
One in three Aussies travel without protection
Digital payment options could see you spend more this Christmas
If you’ve always thought property prices only go up…
Will Australian house prices crash?
Where are we in the global investment cycle and what's the risk of a 1987 style crash?
Money steps for women
Resources on our site to help you, your family and your friends.
Australian Dietary Guidelines and healthy eating chart (PDF)
How to retire, your way
Prepare for retirement without missing out today
Be the boss of your cash
The Australian economy bounces back again
Should you lend money to family?
Money mistakes people make in their 50s and 60s
Australian Dietary Guidelines and healthy eating chart (PDF)
Eight steps to improved cashflow... and lifestyle
Powerful Budgeting, cash flow and Super Tools available on our site.
5 ways Australians will use their tax return this year
Australia's leading causes of death - ABS
The threat of war with North Korea
Six traits of Australians living the dream
The break higher in the Australian dollar is likely to be limited
Money can buy you happiness, you’re just spending it wrong
Key Economic Indicators, 2017 – updated
Helping your kids buy a home
From Goldilocks to taper tantrum 2.0
What’s your debt age?
Doing a budget is a good idea but ....
Planning is the key to making it financially
What to do when you come into money
Managing your money when you move in together
Reduce your bills with these household items
It pays to contribute to your partner's super
How to cope with losing independence
Transition to retirement income streams
The Australian economy hits another rough patch
Watch out for tax scams
The three core pillars of this year's budget
Federal Budget - 2017-18 - Overview
Federal Budget - 2017-18 - Budget documents
Make the most of the current super caps
Five, four, three… it’s not too late to get more in super
Super changes are coming
What’s your debt age?
Australian cash rate on hold
Super changes this financial year - Dr Shane Oliver - video
The door is closing on super’s current caps
Is Donald Trump's honeymoon with investors over?
Estate planning and why you need a super plan
What does a comfortable retirement look like?
Give your career a health check
Super changes from July 2017
Changes to the Age Pension assets test
Keep your money safe over the silly season
Looking ahead at 2017
Review of 2016, outlook for 2017 - looking better despite the political noise
Merry Christmas for 2016, a Happy New Year and a prosperous 2017.
54.2 million worries
Five tips for happy healthy ageing
Thinking about managing your own super?
Sending more to the tax office than you should?
Government pulls back on proposed changes to super
Market Update - What to consider when investing in a low return world
Stop!! Don't do a paper Budget, use our online budgeting tools instead.
Oliver's Insight - Megatrends
Value of Advice
A growing family doesn't have to blow the budget
Blinded by optimism
Thinking about managing your own super?
The investment outlook - it's not all that bad!
What’s your biggest obstacle to financial success?
Ageing Parents
Should you own the roof over your head?
Be a senior entrepreneur on your own terms!
Brexit and other key developments
Brexit wins
Commentary on major issues - AMP
Five money habits for a happy financial year
Are grandparents giving too much?
Remember to factor in parental subsidies at tax time
2016-17 Federal Budget - AMP
2016 Budget in detail
How (and why) to talk to your adult children about insurance
Procrastination: Just do it. Eventually.
Why Australian property won't collapse
The Lucky Country holding up pretty well
Have we reached the bottom?
The evolution of the Chinese consumer
Retirement rolls around faster than you think
Pressed for time?
Changes to the Age Pension assets test
Women are building financial intelligence
Heirlooms no more
Initial market falls precede stronger returns - Shane Oliver
What exactly is income protection insurance and do I need it?
A rough start to the year, which could have further to go
Aged Care - Changes to Assessment of Rental Income
A bump in the road, then a new start
New year, new start – are you ready for retirement?
Review of 2015, outlook for 2016 - Dr Shane Oliver
We wish you a Merry Christmas for 2015 and a Happy New Year
Go easy on the plastic over Christmas
Resolutions for a wealthy future
The Australian dollar doing what it normally does - overshoot. Dr Shane Oliver
How to manage volatility in a low return world
The Australian economy - more help will be needed. Dr Shane Oliver
Insurance through my super
Four tactics to build an investment portfolio
The demand for global infrastructure
Help achieve your investment goals with dynamic asset allocation
The Power of Budgeting
Jump retirement hurdles with a coach
Preparing for the time of your life
A Super Loan for all reasons
Making a smooth transition
Australian Government - Budget 2015
Budget 2015 - some professional opinions
Achieving a comfortable retirement
Is off-the-plan on the money?
Should I take my super as a lump sum or not?
Do you have a key person in your business?
Tips for success in a competitive job market
All you need to know about buying at auction
To sell or not to sell?
Saving in a material world
The Australian economy - more help will be needed. Dr Shane Oliver

Australian economic growth is soft at just 2% year on year. While the economy is rebalancing, expect sub-par growth to continue.



             


  • Ongoing sub-par growth is likely to drive the RBA to cut rates again & the $A is on its way to around $US0.60.
  • Recent profit results reflect the economy, with poor resources earnings but reasonable profit growth from industrials. This is likely to remain the case.

Introduction


The Australian economy remains in a difficult period as the mining boom unwinds. Non-mining activity has bounced back but is far from strong enough to offset the headwinds coming from the mining downturn. This note looks at the outlook for growth, interest rates, profits and what it means for investors. 


Growth remains poor


June quarter growth was anaemic at just 0.2% quarter on quarter or 2% year on year. 



Source: ABS, AMP Capital 

Were it not for a strong surge in public spending and a (likely temporary) bounce in investment in WA, June quarter growth would likely have been negative as consumer spending was soft, housing investment fell, underlying business investment was soft and net exports and inventories cut 0.6% points and 0.2% points from growth respectively. 


Growth outlook


The growth detraction from net exports and inventories seen in the June quarter is payback for positive March quarter contributions and unlikely to be repeated in the current quarter, allowing growth to bounce back a bit to around 0.5% quarter on quarter, which is the average of the last two quarters. 


However, this will not alter the tough position Australian now finds itself in. Mining investment, having risen from around 2% of GDP to 6%, is now falling back rapidly as large projects complete. This is detracting around 1 percentage point from growth per annum. To offset this we need to see growth in other parts of the economy pick up. We have seen housing and consumer spending springing back to life and improvement in tourism and higher education. However, non-mining investment remains disappointing.


The latest business investment (capex) plans from the ABS point to more weakness ahead. Comparing the third estimate of investment for 2015-16 with that a year earlier for 2014-15 points to a 23% fall in business investment this financial year. 



Source: ABS, AMP Capital 

While slumping mining investment is no surprise what is concerning is that the outlook for non-mining investment remains weak pointing to a 7.5% decline this financial year. More broadly, several other factors seem to be playing a role in sub-par growth in the economy, including: steeper than expected falls in commodity prices that continue to cut into national income growth (nominal GDP growth was just 1.6% year on year through last year); the ongoing threat of more budget austerity; household reluctance to take on more debt; delays in the fall in the $A (just over a year ago it was still around $US0.95); and subdued levels of confidence. 


But there are several reasons not to get too negative.


  • Borrowing rates are at generational lows. Australians owe the banks $1.2 trillion more than the banks owe them, so the household sector is a net beneficiary of low rates.
  • The fall in the $A is a big positive for manufacturing, tourism, higher education, services, farming and mining.
  • Petrol prices aren’t as low as they should be, but are down from their highs last year, delivering savings to households.
  • The household savings rate remains relatively high at 8.8% and has scope to drift down supporting spending.
  • Australia managed the boom a bit better than it has in the past when booms led to inflation or trade deficit blow-outs or both and all sectors of the economy boomed together and so went bust together. This time there was no major buildup of imbalances in the economy and sectors suppressed by the mining boom are bouncing back.
  • Reflecting this, real state final demand is up 3.3% year on year on NSW & 3% in Victoria, while it’s down 1.8% in WA.
  • Most Australians don’t get paid export prices so hand wringing over the “national income recession” is overdone.

This should mean the risk of a recession remains relatively low and there is no reason to get overly gloomy on Australia. Rather growth is likely to continue to remain sub-par at around 2% as the negatives and positives balance out. 


More RBA rate cuts and the $A heading to $US0.60


However, with the mining downturn having at least another two years to run the prospect of another few years of growth running well below potential is not appealing. While potential growth in the Australian economy may have slowed to around 2.75% thanks to slowing productivity and population growth, actual growth is running well below this at around 2%. This means spare capacity in the economy will continue to build, with a rising trend in unemployment and downwards pressure on inflation. What’s more, housing construction which has helped the economy looks to be at or close to peaking. Against this backdrop the economy is likely to need more help. 


First, the combination of an extended period of below potential growth, a rising trend in unemployment and weak inflation is likely to ultimately drive the RBA to cut interest rates again. A slowing in Sydney and Melbourne home price growth (as APRA measures bite) should make it easier for the RBA to do this. The November RBA meeting is the next one to watch, failing that then expect a move early next year. While in an ideal world it would be good to see more of focus on economic reforms to drive stronger growth, the political reality means that this will be hard to achieve any time soon. 


Second, the $A looks headed to around $US0.60. The primary driver is the ongoing secular bear market in commodity prices but the likelihood of a further narrowing in the interest rate differential versus the US adds to the case. This will be a typical overshoot in the value of the $A, but it’s necessary to help drive increased demand in non-mining industries like tourism and manufacturing and in turn help drive up non-mining investment. 


Profits disappointing, but good outside resources


The recently completed profit reporting season was a good reflection of the state of the economy. 2014-15 profits were weak overall with June half results being a little disappointing. 43% of companies beat expectations and 59% saw their profits rise from a year ago which is okay, but it’s well down on what we saw in the last few reporting seasons. 


Overall profits fell around 2% over the last financial year and guidance for the current financial year was cautious. 


However, several points are worth noting: 


  • The fall in profits owes to a 35% slump in resources profits.
  • The rest of the market saw profits rise around 7.5% driven in particular by general industrials, building materials, retail and health care stocks.
  • Profits for industrials ex financials rose 11.5%, and are now up four years in a row. See the next chart.
  • Revenue growth remains subdued but is being helped by the lower $A with strength in companies connected to home building and NSW.
  • Dividend growth remains solid at 4% in 2014-15 with 57% of companies raising dividends.


Source: UBS, AMP Capital 

Consensus earnings growth expectations for 2015-16 remain soft at around 4%, driven by industrials ex financials with profit growth of 8.5% more than offsetting another 6% expected decline in resources profits. Low interest rates and the falling $A should help industrial profits. 


Are high dividend payouts to blame for weak capex?


A common view is that companies are not investing because shareholders are demanding high dividends. This may be playing a role but it’s likely to be minor. Contrary to popular perception the dividend payout ratio (ie dividends relative to earnings) is not significantly out of line with its historic norm. For industrials the payout ratio at around 70% is around where it was prior to the GFC. It’s mainly resources stocks that have boosted payouts to around 70% from around 30-40% prior to the GFC) and it’s hard to argue they should ramp up investment after having over invested! 



Source: Bloomberg, Global Financial Data, RBA, AMP Capital 

The real reasons for the lack of investment by non-mining companies is likely to be post GFC caution, wariness after getting smashed through the mining boom by the high $A, high interest rates and high labour costs (just four years ago now) and too high hurdle rates for a low inflation world. 


Implications for investors


First, bank term deposit rates are likely remain low or fall even further. The search for decent income flows has further to run. 


Second, the $A is likely to continue to fall. So continue to favour unhedged over hedged global shares. 


Third, Australian economic growth is likely to disappoint relative to expectations for the US and Europe, suggesting a case to maintain a greater exposure to traditional global shares even though we expect Australian shares to end the year much higher than they are now. 


 



Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.


Hawthorn Financial Planning Pty Ltd ABN 47 011 910 918
Corporate Authorised Representative
Charter Financial Planning Limited ABN 35 002 976 294
Australian Financial Services Licensee Licence number 234665
Registered address Level 24, 33 Alfred Street Sydney NSW 2000
Legal Disclaimer | Privacy Policy



Hawthorn Financial Planning 67 King William Road UNLEY SA 5061 Ph: (08) 8339 7973

IMPORTANT INFORMATION | Site By PlannerWeb