Only Time Will Tell Where the Australian Economy is Headed

eChoice RBA Commentary for August 2015

The RBA have left the official cash rate on hold at 2.0 percent.

This decision was based on:

o The RBA needing to assess if the May rate cut will have an impact;

o Further depreciation being needed in the Australian dollar;

o Greater economic growth being required;

o Business investment needing to increase;

o Greater growth in wages being required;

o Household incomes needing to increase; and

o Employment rates expected to rise.

The Reserve Bank of Australia (RBA) have left the official cash rate on hold, at 2 percent, amidst speculation over where the Australian economy is headed.

At present, the RBA are using the ‘wait a see’ strategy as they continue to monitor market conditions. Many economists are predicting that the RBA will continue to monitor conditions until the end of the year, with little or no movement occurring in the official cash rate over this time. This is attributed to further economic growth being needed, household income needing to increase, along with population growth, and unemployment rates needing to fall. The housing bubble in Sydney and Melbourne is also of concern.

Unemployment Rates are Rising

Unemployment is still a matter of concern with company hiring declining, which, in turn, could push the jobless rate higher. However, recent job vacancy data suggests that labour demand just may be strong enough to maintain a stable or even declining unemployment rate. Despite this, the RBA still remain cautious, especially given that wage growth remains low, and that at 6 percent, the rate of unemployment is still elevated.

The RBA are predicting that unemployment nationally will hit a 6.5 percent low, as population growth is doing little to stabilise the unemployment rate, The RBA will publish a revised forecast in early August.

The Australian mining-investment boom is continuing to wind-down, which is increasing unemployment further, plus many economists suggest that the central bank have been relying on the steady flow of migrants to boost the economy. But given that the nation’s appeal is waning due to the jobless rate climbing above U.S levels, the U.S is now looking like a better option for migrants. As a result, Australia’s migrant rate has fallen and population growth is at its slowest growth level in 9-years. This is not a favourable sign for an already struggling national economy.

Australian Population Growth

Australia’s population growth slowed by 1.4 percent during 2014, or double the average rate. However, this is 0.4 percent lower than two years earlier. The slowdown conflicts with the RBA’s May forecast of a 1.7 percent gain in the working-age population for 2015. Thus, it is anticipated that the Australian economy will have a short fall in growth near term, which justifies policy makers taking the ‘wait and see’ approach.

Migrants are not the only population issue Australia is currently experiencing, a natural increase in population has slowed also, with 2014 recording the weakest levels of growth since 2006. Historically speaking, this is attributed to the fact that Australian households typically only have more births when income growth is sustained. At present, income growth is at its slowest since the early 1990s.

Another issue that policy makers face, is that less workers will result in a revenue decrease in personal income and consumption tax. The fiscal deficit is currently over 2 percent of gross domestic product (GDP), which has been compounded by the fall in iron ore prices.

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Housing Investment

The decrease in the official cash rate in May 2015 to 2 percent has fuelled a property price surge in the Sydney and Melbourne markets. This has resulted in a building boom in these regions with construction companies looking to cash-in. While policy makers have viewed the building boost as a viable way to ease employment shortfalls and to increase former mine worker employment, there is also a potential for a property glut as population growth eases.

Previously it was estimated that there would be a shortfall of 140,000 dwellings by 2017. However, revised data suggests that there will be an excess of 75,000 homes.

New Lending Policy

The new directives that the Australian Prudential Regulation Authority (APRA) have introduced to curb investor borrowing has seen banks and other lenders make significant changes to their lending policy. These changes include approval terms and serviceability requirements through to investor loan suspension altogether.

The AMP Bank has suspended its investment loan acceptance for the rest of 2014, and it has raised existing property investment loan rates by 0.47 percent, or 20 basis point more than other major bank increases that were announced in July. This is due to the lender having approximately 13.1 percent of investment loans, to $2.92 billion, which is above APRA’s 10 percent limit.

Tougher Lending Should Reduce Housing Bubble

Leading property analysts are suggesting that as investor loan limits start to take effect, then this should see the latest home price boom ease. Auction rates are beginning to fall in Sydney and Melbourne, and buyers are starting to hold back.

Lending changes are expected to prevent weaker borrowers from buying, which is what the RBA were hoping for when these changes were introduced. But rate rises by banks may curb other investors from buying, and possibly may even see them electing to sell their investment property. Though, real estate experts are suggesting that interest rates would need to rise by at least 1.5 percent before many investors will make a move.

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