August outlook: heading out of the woods

Founder and Publisher of the Switzer Report
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Inch by inch, the key players are muddling through the economic and financial market dramas that have played havoc with our wealth, as well as our sleep at night. Sure, we aren’t out of the woods yet, and if we were, I’d be screaming it from the rooftops; but we are definitely heading in the right direction.

And while I totally believe in my sentiments above, history has shown us that a fool in Europe or a dope in the US Congress or Greek Parliament can derail the progress.

What to watch

This week, we’ll be given another update on China’s recovery, but it’s still early days. I expect to see something around November that will help market optimism, but I do like the Shanghai Composite’s nice run lately. The Chinese index has become an important lead for our market and it will be a good guide to how the Chinese economy is recovering.

In Europe, the European Central Bank (ECB) president Mario Draghi has to come up with some measures that make European banks look safer while also bringing the yields on the sovereign bonds of Spain and Italy down to more sustainable levels. Wall Street market makers will be listening to Super Mario and let’s hope he doesn’t end up being a Donkey ‘Nong’! They will be watching bond yields in Europe as well. If these head in the right direction, so will our stock prices.

In the USA, the nice report of 163,000 jobs in July against an expectation of 100,000 was the kind of good news I was sweating on and if you add the better-than-expected company reporting, then the Yanks are poised for a good end-of-year rally, provided the US Congress doesn’t send the economy over the so-called ‘fiscal cliff’.

There is also a US election, which has the potential to rattle confidence. But I believe if China recovers and the EU and ECB happen to impress markets, then Wall Street will spike big time, regardless of the country’s political challenges. Also, I don’t believe Congress will let the economy fall over the cliff into recession.

More rate cuts?

At home, after nearly two years of harassing the Reserve Bank of Australia (RBA), I think they have largely got interest rates right, though I would like to see another cut before the year is out. Some experts can see four rate cuts, such as Stephen Koukoulis, the former economic adviser to the PM, but I think that would only be likely if Europe turns to mess and stock markets plummet. I think he is wrong.

The cash rate at 3.5% is the lowest for two years and that should gradually help to raise business and consumer confidence.

Let’s focus on economic growth and jobs because these two stats paint a fair picture of how crazy our economy has looked, partly explaining why the RBA has had difficulty getting the mix right.

In March we learnt that the December quarter growth figure was 0.4%, taking the annual reading to a low 2.3%, but then in June the March quarter figure was 0.6%, making the annual kick up to 4.3%! Many economists doubted this figure and it proves my point that our economy is tricky to read being two-speed.

That said, I think we’re at a turning point where we will see good and bad news, but the good is starting to outpoint the bad. Have a look at the latest numbers below.

Here are the positives:

• Retail trade rose by 1% in June after a 0.8% rise in May. Annual spending growth lifted from 2.1% to 3.7%.

• The RP Data–Rismark Home Value Index reported that capital city home prices rose by 0.6% in July and apartment prices rose by 0.7%.

• New homes sales rose by 2.8% in June, after rising by 0.7% in May. Home sales have improved consistently since hitting 11-year lows in March.

•Private sector credit rose by 0.3% in June after a 0.5% rise in May. Annual credit growth rose from 4 to 4.4%.

• Business credit rose by 0.5% after a 0.8% lift in May. Business credit is 4.4% higher than a year ago, marking the best annual growth rate in over three years.

• Dwelling approvals fell by 2.5% in June, but they rose by 27% in May!

• The Consumer Price Index rose by 0.5% in the June quarter, in line with expectations. The CPI stands just 1.2% higher than a year ago – the lowest rate in 13 years.

• Net household wealth per capita rose from $$47,269 to $50,786 in the March quarter – the second consecutive quarterly increase.

• Consumer sentiment rose in July for the third month in a row with the Westpac Melbourne Institute index of consumer sentiment showing a 3.7% lift in the index to 99.1, from 95.6 in May.

• The number of tourists arriving in Australia rose by 3.4% in June to record highs.

• Australia recorded a turnaround on trade with a deficit of $313 million in May transforming into a small $9 million surplus in June.

The significant negatives:

• The Performance of Services index fell by 2.3 points to 46.5 in July. The sector has contracted for 19 of the past 24 months.

• The Performance of Manufacturing index fell by 6.9 points to 40.3 in July – the weakest reading in over three-years.

• The NAB business confidence index fell from -2.2 to -2.7 in June – a ten-month low.

As you can see, the negatives are significant but the weight of pluses and negatives are in favour of the positive. If we factor in China’s expected recovery, the USA’s better job numbers and better-than-expected company earnings reporting, as well as the possibility that the nincompoops in the EU are pulling their fingers out, then the chances of our economy getting gradually better is more likely than not.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Anyone should consider the appropriateness of the information in regards to their circumstances.

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