Over the last few months it has been quite remarkable to witness how the believers in Ken Henry’s ‘Golden Age’ have started to sound a little downbeat as the economic slowdown in China can no longer be ignored. Therefore it seems like an appropriate time to try and assess what impact this slowdown is having (and may have) on the Australian economy and review the charts for a few important economic indicators.
Firstly let me clarify why I am including the residential housing market into into this review of economic indicators since many people would argue that the residential real estate market in Australia and the global economy are not related.
However I would argue that the housing market is a very good indicator of household financial confidence which in turn is impacted by economic events in China or Europe for example. So for that reason I am going to include house prices into my list of economic indicators that I will review on a regular basis.
At the start of the year I suggested that there would be a scramble to downgrade forecasts for economic growth in Australia (and elsewhere) as the year progressed. Well that scramble is now in progress.
Recently even the number crunchers at Treasury seem to have finally checked the water cooler and have admitted that their past forecasts may been been a overly optimistic. According to a recent article in The Australian:
“TREASURY is establishing a formal review of its forecasting performance following a period in which its growth and budget balance forecasts have proven excessively optimistic.”
As regular readers of my articles will know, I haven’t put much faith in Treasury’s forecasting skills and I suspect one reason for the review is to give them some scope to revise down much of the data they included in the recent budget papers. This will also give the Treasurer scope to defend his latest work of fiction (the 2012 Federal Budget) since he will be to tweak everything to reflect the “new numbers” Treasury will come up with.
I think it is also safe to assume that there will be a revision downwards of the economic forecasts made by the RBA. (In early May the RBA already started doing this)
Having said that, the Australian economy has held up over the past few years better than I thought it would, but that’s largely to do with the massive economic stimulus package released by China in response to the GFC. Since it doesn’t look like the Chinese are inclined to do this again, the Australian economy will have withstand any external economic shocks largely by itself.
At this point let’s have a look at a few economic indicators and try and get a feel for how the Australian economy is faring at the moment.
Australian ASX All Ordinaries Index 2002 – 2012
Shown above is the 10 year chart of the Australian ASX All Ordinaries Index. The bull market run from 2003 to the end of 2007 is quite easy to see as is the rapid fall back down towards 3000 points during the dark days of the financial crisis in 2008 & early 2009.
It’s important to keep this long term view of the stock market in mind as it helps keep the current movements regarding stock prices in perspective. As I have mentioned many times, the Australian share market is already trading at recession like levels and has not experienced the sort of rally enjoyed by the U.S. Dow Jones or S&P 500 for example.
In short, the ASX All Ords is currently trading back where it was in 2005 and around 2,500 points below its bull market high reached in late 2007. The ‘boom’ premium therefore, has effectively been erased from the market.
Another indicator well worth looking at (and not often covered) is the ABS data covering Australian company profits.
Australian Company Profits 1991 – 2011
Source: Austrlaian Bureau of Statistic (ABS)
Unsurprisingly this chart looks similar to the chart of the ASX All Ordinaries Index. As we would expect as the stock market was rising so were company profits, which hit a peak largely due to high commodities prices in late 2007. Company profits then slumped during the GFC but recovered quite strongly supported by the miners & banks many of which delivered record high profits.
Now that the Chinese economy is slowing and commodities prices falling, it seems likely that the total of company profits in Australia will trend downwards in 2012 and so I expect the next update of this chart will reflect this.
Another good economic indicator is the Reserve Bank of Australia’s (RBA) Index of Commodity Prices. I reviewed this chart back in October 2011 (see The ASX All Ordinaries and the Commodities Bubble) and discussed what a fall in hard commodities prices would mean for the stock market. So far what I discussed back then seems to be playing out now.
Clearly commodity prices have fallen as shown by the RBA’s Index along with the prices for shares in the major miners such as BHP Billiton & RIO Tinto. How much further these will fall will depend on how much further the Chinese economy slows.
Finally in regards to the housing market let me quote from a media release issued by RP Data on the 1st June.
“Residential property values have continued to slide across the capital cities, with the RP Data-Rismark Home Value Index recording a -1.4 per cent fall in dwelling values over the month of May. The latest drop brings the cumulative decline to -2.2 per cent over the first five months of 2012 and overall values are down -5.3 per cent over the past twelve months.”
Also from the media release:
- Best performing capital city: Adelaide +1.0 per cent over the three months to 31 May 2012
- Weakest performing capital city: Melbourne, -4.6 per cent over the three months to 31 May 2012
- Highest rental yields: Darwin houses with gross rental yield of 6.0 per cent and Darwin Units at 5.9 per cent
- Lowest rental yields: Melbourne houses with gross rental yields of 3.7 per cent and Melbourne & Adelaide units at 4.5 per cent
If we accept that this Index is accurately reflecting the state of the housing market then it would appear that house prices are under some pressure.
One positive however for the housing sector is that the RBA is likely to cut rates again, but I doubt this will have much of an impact on the property market this year since concerns about the Australian & global economy will must likely offset this move in interest rates.
My reading of the economic indicators discussed above is that the Australian economy has clearly passed it’s peak for now and that the commodities boom (for now at least) is over. My guess is that all these indicators will show weakness again in six months time apart from perhaps the stock market, which may be in the midst of a run towards 5000.
Greg Atkinson is the editor of Shareswatch Australia and the Managing Director of Ohori Capital He is originally from Australia but currently resides in Japan. He can be followed on twitter via @GregAtkinson_jp