Finally it seems the Reserve Bank of Australia and Treasury have had to accept that the mining boom has peaked or is peaking, which is something I have been talking about on this site for some years. However the RBA, Treasury and Gillard Government all still appear to be relatively upbeat about the outlook for the Australian economy next year which is surprising, since I don’t see a lot to be optimistic about as I review the stock market, housing market or a few other economic indicators.
Let’s start this brief review of economic indicators with a look at the ASX All Ordinaries Index over the last 25 years.
Australian Stock Market – ASX All Ordinaries Index 1988-2012
On this long term chart of the ASX All Ords I have highlighted five key market phases.
1. The Build-up. This is when the All Ords, after few major corrections, steadily moved up towards and then past the 3000 points level prior to the boom market taking hold from 2003. This Build-up phase ended when the market slipped back during 2002 in the aftermath of the dotcom/tech bubble implosion. I have drawn a rough trend-line in green to highlight this phase.
2. The Boom. This is the phase where our stock market soared as commodity prices and volumes rose plus the global economy was seemingly doing well. This phase came to a crashing end when the GFC hit in late 2007. I have drawn a dark blue trend-line to highlight this phase.
3. The Crash. I have marked on the chart in red the GFC triggered slump from late 2007 to the stock market bottom which was finally reached in early 2009.
4. The Rebound. Basically a classic bounce off a market bottom. This pushed the All Ords up to around 5000 points by the end of 2009 and is indicated by the blue line.
5. The Paralysis. This is the phase we are in now marked with a black line. The All Ords is basically drifting sideways waiting for some reason to rally but is probably already sold down enough not to be in danger of slumping below 4000 for any extended period of time. (for now at least) This phase started basically at the end of 2009/the beginning of 201o.
I believe it is important to take these five phases into account when reviewing other economic indicators especially the last four phases which can be spotted fairly easily even without trend-lines on the 10 year chart of the All Ords below.
All Ordinaries Index (XAO) 10 year chart
Now if we look at some charts from the RBA’s latest chart pack (released last week) we can see they have much in common they have with how the All Ords has fared since 1988.
The RBA Index of Commodity Prices is interesting because it shows that during the All Ords Build-up phase that commodity prices we generally flat. During this time it was the non-mining related stocks that helped the push the market higher especially the financials.
Then from 2003 commodities prices started to rise sharply and continued to push higher until the GFC sent commodities prices tumbling. After this initial slump in prices things got interesting (and worrying) because the rebound phase for commodities sent the RBA Commodities Index above its pre-GFC peak. Why?
The simple answer is that commodity prices got a boost thanks to quantitative easing (QE) and economic stimulus measures implemented across the G20 economies. In many cases this meant governments attempted to solve a debt crisis by getting in more debt or in the case of China, building, building and some more building apparently would do the trick.
But despite this second peak, prices for a whole range of commodities are trending downwards and although they will (and are) getting some support from QE4 in the U.S. and pro-growth policies in China, I believe they still have a lot further to fall.
The fall in commodity prices is already having an impact on the Australian economy and if they were to fall further, then it is likely house prices will come under further pressure even if the RBA cuts interest rates again.
Now let’s look at the residential property market which I believe demonstrates how commodity prices are putting a drag on home prices.
Earlier I mentioned the five phases that the All Ords has been through over the last 25 years and if you look at the right hand side of the chart above and focus on the “Australia” line you will see that price rose before the GFC, pulled-back for a while during the GFC and then rose again to a new high after which they fell again on a national level. That’s pretty much mirrors 4 of the 5 ASX phases I outlined. (The RBA chart above does not cover the Build-up phase time-frame)
Clearly the stock market, commodities prices and dwelling prices are moving through similar phases which is hardly surprising. It’s also the reason I watch the real estate market (and many other markets) rather than just focus on share prices and stock market indexes.
The recent interest rates cuts by the RBA have helped prop up the residential property market but there is no doubt in my mind that if commodity prices start another run downwards then dwelling prices in Australia, on a national level and in most capital city markets, will fall.
The next chart I want to focus on is Household Wealth and Liabilities because this is where we can get a feeling for how the performance of the economy is impacting households.
This chart is probably the one that concerns me the most because clearly Net worth is falling and although debt levels, it could be argued are manageable, that’s mainly appears to be because Dwellings are are holding up Net worth.
Again if you look at Net worth you will see it has moved in similar phases to the ASX All Ords Index, the Commodity Prices Index and Dwelling Prices.
The big difference in my opinion is that the stock market took a major hit during the GFC, rebounded somewhat but has remained way below pre-GFC levels.
Commodity and dwellings prices however still appear to be relatively high and this suggests to me that are likely to drift downwards over the next couple of years.
Finally let’s have a look at GDP growth.
There are many ways you could interpret this chart. Firstly it does show that the Australian economy has had a pretty good run for the last 25 years or so with just three questers of contraction. But on the other hand GDP growth appears be trending lower with the 4% growth mark being reached less frequently in the last 10 years despite the mining boom.
Still the overall growth in the economy has been fairly robust for many years but can this growth be sustained during a period of lower commodity prices and reduced mining investment? Probably not would be my guess.
So in summary I expect that over the next six months or so commodity prices will continue to trend downwards, house prices will remain under pressure and the ASX All Ordinaries will essentially still be moving sideways even if it does get back up near the 5000 level.
This article was written by Greg Atkinson who 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