Why that ‘great’ Aussie recovery may not last

Everyone got excited this week about our ‘strong’ December quarter GDP print of 1.1% seeing us avoid a technical recession after the September quarter saw -0.5%.  Whilst there was lots of back slapping in Canberra and rejoicing in mainstream headlines few probably read on to see what’s going on behind the scenes.  Combined with a stark warning from the OECD last night (below) we should be taking note and managing our wealth to contemplate a not so ‘awesome’ recovery…  Sam Volkering of Money Morning had this to say:

“Truth is, 1.1% looks great on the surface, but it’s not exactly party time just yet. The likely outcome from here is that the next quarter is a fraction of that. In fact, growth could be negative in the next quarter.

The December spike was off the back of a mini-boom in commodity prices.

However, there are reports that China is now at ‘peak iron ore’. Also, the Chinese government is making moves to crack down on a Chinese property bubble. And they’re also trying to curb capital outflows.

This all points to issues for the Aussie economy. If China doesn’t want as much iron ore, that’s going to hurt. If they don’t flood the property market with money leaving China, that’s also going to hurt. If that happens (and it already is) then the next few quarters probably aren’t going to show much growth.

You should expect  growth in the next quarter to be weak. It will likely fall back in line with the poor wages growth and minimal household disposable income growth. Add the fact should that, if we head back toward recession, you’ll see more underemployment and hidden employment issues.

The most telling statistic to come from yesterday’s figures was household disposable income, which rose just 0.2%. A big reason for this is because wages growth in the country is virtually non-existent.

But pay attention to the mainstream coverage of our escape from disaster and you’d think everything was A-OK. That’s like someone spitting on you and trying to convince you there’s a monsoon.”

The big question then is what will the RBA do next meeting…. Hold or Cut rates.  The dilemma to date has been our property bubble and the risk of it going pop if they lowered rates more.  However lately, as we’ve discussed before, given the rising rates around the world on bonds tanking and a probably US Fed rate hike on 15 March, the real cost of funds for banks is disconnecting from our cash rate.  i.e. mortgage rates won’t drop on the next rate cut here.  We think Sam might therefore be bang on when he says:

“I think the RBA will cut the cash rate at the next meeting by 0.25%. They must know the December quarter growth was a fluke. They must be aware that the dollar is too high. But they must also be aware that the banks are moving rates independently, so maybe now is the perfect time for a rate cut.

If the Aussie dollar continues to march higher and economic growth falls, the RBA won’t have any other choice. The best outcome here, believe it or not, will be to cut rates.

A cut in the cash rate could help ease back the Aussie dollar. It might spur a little more economic growth. Those corporate profits might rise again, and flow through to employees. Businesses will grow, expand, employ full time. Perhaps household incomes will rise, even disposable incomes. Or at the very least, it will keep our heads above water until the US makes a move.

Some might expect this to further fuel a housing price surge. It won’t. An RBA rate cut will come amid the rising cost of lending to our banks. They’ll be pushing up their retail rates while the RBA is cutting.

It won’t fuel higher property, as higher retail rates will put it out of reach at current prices.”

As we saw last night, a dropping AUD is great for Aussie metals holders… 

Finally the OECD sent a stark warning our way last night.  From the AFR today:

“Australia's vulnerability to a house price collapse morphing into a recession has sharpened because of ballooning household debt and the dominance of big banks, according to the Organisation for Economic Co-operation and Development's latest report on the economy.

Putting the risk of a recession at around one in five, the Paris-based OECD says alongside a shakeout in China and ongoing weakness in business investment, the single biggest threat to the nation is from a potential hard landing in the property market after years of double-digit price gains.

OECD officials – writing in what is their first major review of Australia's economy since 2014 – said the housing market may not "ease gently" and could develop into a "rout on prices and demand with significant macroeconoimc implications".

A chief consequence would be a juddering shutdown in household consumption and a surge in mortgage defaults that would ricochet around the economy.”