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Economic indicators, the Australian economy and the stock market

December 15th, 2010 · Greg Atkinson · 16 Comments

As the year has progressed I have noticed that my view of the Australian stock market and economy has become increasingly at odds with most of the mainstream market commentators back in Australia.  Whereas they see reasons to be optimistic and feel the economy is robust, I feel the situation is quite different and believe the Australian economy is dangerously unbalanced and possibly primed for a nasty correction.

The primary reason I see things differently is because I am not based in Australia, therefore I’m generally spared from the relentless political spin spewed out by the major parties and the self serving ramblings of Ken Henry at the Treasury, who still appears to be believe he almost single single-handedly saved the nation from an extended recession.

Instead I focus mainly on economic data and indicators in order to study such things as trade figures, commodities prices, the stock market, consumer confidence, business lending and of course my old favourite: the Baltic Dry Index.  None of these indicators alone ever gives us the complete picture of how the economy might be doing or will do in the future, but if we look at them (and many others) constantly as a set then we can at least get some idea of what might happening in terms of the Australian economy and the wider global economy as well.

As a result my assessment of the market is influenced more by data and figures rather than what the politicians are telling me or what some desk bound market commentator in Australia is writing about.  In addition if I sense from my business dealings in Japan and Asia that the business in the mood in the region is somewhat cautious then I trust this more than whatever wisdom Wayne Swan might utter forth.

Before discussing some of the key economic indicators I have been watching we need to understand the current investment environment we are in now.  Most importantly we need to appreciate that a huge amount of economic stimulus has been pumped into economies across the G-20 over the last few years.  Much of this money was probably not directed very well and was simply a knee jerk reaction to the global financial crisis.

We are told that this quick action by the leaders of the G-20 Group of Nations saved the planet but let’s face it, do you expect them to say anything else?  I doubt they are going to issue a statement saying they blew a fortune for nothing. So we are unlikely to ever know how effective all that stimulus spending really was but we can pretty sure plenty of, plenty it was wasted in one form or another.

However if we put aside the merits/demits of the G-20 actions what we do know is that the economic stimulus pumped into the global economy did stir up demand for commodities and everything from cars to flatscreen TV’s.

This is important to keep in mind because much of the economic activity around at the moment has be fuelled by government spending and not by consumers or the business sector alone. (and in much of this government spending has been undertaken using borrowed money….but that’s another story)

So let’s quickly look at some of the economic indicators and see what they might be telling us.

Baltic Dry Index (BDI)

The BDI is still weak and is now around 2000, well below the high of 2010 of around 4200 in May.  Remember a lot of shipping capacity has been taken out of the system  so if there is a widespread global economic recovery underway then it appears the shipping companies aren’t seeing it.

The weakness of the BDI suggests to me that the impact of the G-20 economic stimulus measures are starting to wear off and that this should be raising a red flag in the minds of policy makers in Australia.   However they still seem to be obsessed with fighting inflation and that’s a worry.

Gold Prices

I look at the price of gold as an indicator of investor fear.  When investors fear the sky is falling in they head towards gold and then when they think money is to be made elsewhere, they exit their gold positions.  At the moment the gold price is around $1400 USD an ounce but we need to take into account that the USD has basically been this years dud currency.

In AUD terms, gold has not done much this year and this suggests to me that investors are not quite as panicky as they were last year.  Of course the gold bulls will keep talking up gold just as the oil bulls talked up oil prices a few years ago, but as I said a while back I doubt we will see gold at $2000 USD an ounce any time soon.

Australian Domestic Economy

Have you noticed that when bad economic data comes out regarding the economy that it is described as a bump in the road but when good data comes out it is treated as a long term trend?  It appears to me that many Australian market commentators, the Government, RBA and many analysts are blinded by economic group thinking and simply keep re-enforcing each others overly optimistic view of Australia’s economic performance.

If they are right, then next year I am going to look like one silly (sillier) fellow, but imagine the what consequences will be if they are wrong?  Maybe
that alone is a good reason to be cautious about the outlook for 2011.

ASX listed companies exposed mainly to the domestic economy don’t appear to be doing that well to me so I am very wary when I read about how well the domestic economy is doing.

Australian Exports

Although economic writers like Ross Gittins might think Australia is basically an economic island the reality is much, much different.  Our continued growth depends largely on exports and we earn most of our dollars in this area from commodities hard and soft.

Just imagine what would happen if commodities prices slumped and mining investment in Australia slowed to a trickle.  Does anyone seriously believe that if that were to occur that the Australian economy would keep growing strongly and move ahead without suffering any more than a scratch?

Over the last few years our other big export dollar earners; tourism and educational services, have slumped and this should worry all of us because it leaves the economy heavily dependant on commodities prices.  Commodities prices my friends do move in cycles and although times might be good now, as
sure as night follows day prices will enter a period of decline at some point and that may send shock waves throughout the economy.

Australian Residential Property Prices

Now with great trepidation, let me touch upon the very emotional subject of home prices and the overall Australian residential property sector. By now I had been expecting house prices to have fallen by around 10% when compared to 2009 and so clearly my attempt at crystal ball gazing has not been very successful.

Despite higher interest rates, Australian’s love affair with housing has basically continued supported by a a rising population and the willingness of banks to lend.  This is either a sign that the economy is fundamentally strong or is a result of terrible policy decisions made by successive governments and the RBA.

There is no certain objective way to tell for sure at the moment if the housing market is fundamentally sound or if it is the Australian economies Achilles heal. Personally I am now fairly cautious about property prices over the medium term and see more downside than upside potential.  But then again, I said the same thing near the end of last year!

Australian Stock Market

Throughout the year I have provided a running commentary on the movements, trends and outlook covering the Australian share market so I will be brief now.

Basically my view is that the stock market is a leading economic indicator and therefore it generally (but sadly not always) gives us a good idea of how the economy is really doing.  If company profits are rising and the outlook for listed firms is rosy, then investors tend to buy stocks and the market heads up.  The reverse is true when company profits slump and as a result investors sell out of shares and the market falls.

For most of this year the market has traded in a narrow range between about 4400 – 5000 and this suggests to me that we are simply still in what I once described as the Economic Twilight Zone.

Investors are really unsure what to make of all the economic data out there and the stock market is certainly not reflecting that people who move money, really expect at the moment that 2011 to be a good year.  If they did, the Australian stock market would be much higher than it is now.

I appreciate I have only scratched the surface in terms of looking at all the relevant economic indicators above, but over the past 12 months I have been watching closely a whole range of data (much of which I have written about) and this all leads me to conclude that the outlook for 2011 is still very unclear and that a cautious approach is the most prudent for now.

I am sure many readers will disagree with me and I am happy to hear where I might be going wrong.  Perhaps 2011 will be as strong as the Government, RBA, Treasury and others seem to think it will be?  Or maybe, just maybe, we are witnessing policy blunders being made now that we will result in the economy entering an extended period of contraction in the year or years ahead?

What do you think?


16 responses so far ↓

  • 1 scottmuz // Dec 15, 2010 at 8:29 pm

    Hi Greg,

    I moved back to Australia 6 months ago after
    nearly two decades in Europe.

    I tend to agree with your overall assessment.

    When an economy is as highly leveraged as Australia,
    small changes or even second derivative changes can
    have magnified and unexpected impacts.

    What has shocked me is how uncompetitive prices are
    in Australia. When I left in the 1991 and even when I
    visited latter in the 90s many things were cheap
    (e.g. food).

    But compared to the UK prices are at least
    30% higher across the board (and the UK is not a
    cheap place to live).

    As for housing I refuse to buy into the madness and
    will happily rent for the rest of my life
    rather than choose to leverage myself up to my
    eyeballs.

  • 2 Greg Atkinson // Dec 15, 2010 at 9:07 pm

    Hi Scott,

    Thanks for the comment. I use to recall telling people overseas a decade or so ago how inexpensive things were in Australia and like you, I am quite shocked now when I go back and find how expensive things have become.

    Taxi fares for example seem to have gone through the roof! A cab ride from Sydney airport makes Tokyo taxi fares seem like a bargain!

    I do worry about how much of the economic growth in Australia is based on household debt. Yes all seems fine now because there are no major problems in terms of servicing that debt, but as we saw in Ireland, the path from economic wonder kid to basket case can be pretty short!

    I hope I am wrong. But for the time being I will remain in cautious mode.

  • 3 Ned S // Dec 23, 2010 at 12:45 pm

    Merry Chrissy Greg!

    Some lite entertainment for you for the festive season courtesy of Mr Putin – Nice to see some things never change: 🙂

    http://www.theaustralian.com.au/news/world/ex-spy-anna-chapman-is-putins-new-pin-up-girl/story-e6frg6so-1225975396593

  • 4 Ned S // Dec 24, 2010 at 3:03 am

    And here I was having a bit of a chuckle over Putin – The blot thickens? :

    http://www.smh.com.au/world/mi6-spys-death-may-have-been-linked-to-interest-in-bondage-20101223-196my.html

    Those Brits have really got to give some serious thought to doing away with their boy’s only private schools perhaps?

    Ah, it’s Chrissy – Definitely time for a laugh and a joke! 😀

  • 5 Greg Atkinson // Dec 24, 2010 at 8:04 am

    What can I say Ned? Putin does seem to have an eye for talent! I am not going to comment on the MI6 story until I do an audit of my own wardrobe 🙂

    All the best for Christmas!

  • 6 Biker // Dec 28, 2010 at 5:29 pm

    Never found Britain cheap last year. Fuel for example, was twice the price… and still is. Housing? Much more expensive in England and Scotland… for what you _get_ for the money.
    Supermarkets? Prices about the same. European wine was cheaper,
    but anything good was 20% more than Oz.

    I guess if one prefers the UK, one should probably emigrate.

    Renting for life sounds like a good plan, providing a fella is competently investing the difference one saves, on an appreciating, tax-friendly a$$et. (Anyone who finds one should please let us know… . 😉 )

    Happy New Year!

  • 7 Greg Atkinson // Dec 29, 2010 at 9:51 am

    To be fair Biker I don’t think we can truly judge the cost of living in a country until we actually live there. People for example tell me Japan is expensive but I don’t find that to be the case at all once you get yourself sorted.

    I see some merit in renting for life, it does free up a lot of capital and gives people a lot of flexibility especially in terms of moving to push their careers forward.

    One thing people often overlook is the “opportunity cost” of owning a home. Sure it is good to have a home especially if you benefit from capital gains but owning a home can often prevent people from doing other things like moving overseas to work or starting up their own business if they have a large mortgage.

    Each to their own I say.

  • 8 Biker // Jan 1, 2011 at 6:38 am

    “…gives people a lot of flexibility especially in terms of moving to push their careers forward…”

    Both our sons would agree with you, Greg. Both are now working OS. They’re both yet to suffer a major sharemarket correction, having bought in low, mine dew!

    We’re watching a slow upswing in the market here. Construction has slowed, but we’re now phoning vendors who have recently sold blocks, to ascertain sale prices. Looks around 16%+ pa for 2010.

    We wouldn’t have the courage or confidence to ‘rent for life’, I’m afraid. (Very afraid!~) Perhaps if we were confident that we could consistently excel in a non-property asset into our late-80s, it might be different. There’s a lot of reassurance in watching tenants and inflation repay your debt, with the comfort of brick-and-mortar owned outright in the long term… . 😉

    Happy New Year to all. 😀

  • 9 Ned S // Jan 4, 2011 at 7:24 am

    Albert Edwards: “Big structural bear markets take 19 years on average and have four recessions,” he says. “We’ve had two.” :

    http://www.guardian.co.uk/business/2011/jan/03/albert-edwards-socgen-bear

  • 10 Greg Atkinson // Jan 4, 2011 at 9:41 am

    That outlook covers quite a period…19 years! Anyway recessions are part of the economic cycle so as I have written a few times I expect them to roll along ever decade or so.

    I reckon the US is set for it’s own ‘Lost Decade’ and is already a few years into it.

    The big question I keep asking myself is: “when will the next major recession hit the Australian economy” ?

    My guess at this stage is 2011/2012.

  • 11 Ned S // Jan 4, 2011 at 10:31 am

    The QLD floods aren’t helping at the moment Greg. If you were into trading commodity futures, coking coal probably would have been worth a look a while back.

  • 12 Greg Atkinson // Jan 4, 2011 at 10:42 pm

    Yes indeed the floods will affect the market. I wonder why we always seem to get caught out by the floods after years of drought?

  • 13 Remy // Feb 3, 2011 at 10:16 pm

    Hi Greg,

    This is a really helpful summary of the economic situation right now.

    I am a school student and I currently have an assignment on the economic indicators of australia.

    This is the assesment topic:

    Utilising economic indicators and economic commentary, analyse the major reasons for the position of the Australian economy on the business cycle and the emerging concerns about inflation.

    Given your knowledge of macroeconomic management, identify and evaluate the various policy options available to the Reserve Bank of Australia and the federal government in managing the economy.

    Do you have any comments to say about this or opinions on what i should incorporate in this report.

    Thank you!

  • 14 Greg Atkinson // Feb 4, 2011 at 11:02 am

    Hi Remy, I am probably not the best person to ask if you want to get a good grade as my answers would probably not make your teacher very happy 🙂

    The options available to the RBA are actually fairly limited and are set out well on their website. Their main tool is interest rates, but how effective this is in managing the economy is questionable. I could rant on some more but if you google ‘interest rates and the economy’ and a few variations you will see plenty of discussion on the subject.

    I also think this post of mine: GDP growth does not equal a quality Australian economy. is worth looking at, especially the YouTube clip. It raises a lot of questions about the obsession policy makers have with GDP growth.

    Regarding what the Government can do, I suggest you list up the areas they have a direct impact and google away. In the economy and politics section on this site I talk about some of these areas such as:

    – Taxation polices.
    – Workplace reform.
    – Government spending.
    – Sector regulation. (financial, telecoms etc)

    But there is much, much more.

    Finally, have a look at inflation from a few different angles. Don’t forget we also import inflation and deflation.

    We could also question the wisdom of raising interest rates as a means to control inflation while the Government is spending to try prop up GDP growth.

    Anyway, I hope that gets you started. Some other readers might be able to suggest some ideas as well to help you with your assignment.

    P.S Throw in the Baltic Dry Index as well..that will catch your teacher off guard 😉

  • 15 Remy // Feb 6, 2011 at 9:40 am

    Dear Greg,

    That is so wonderful! Thank you for taking the time to write that for me! I will definitly have a look at all of that and the other post you linked me to is great!

    Can’t wait to ace this assignment!

    Thank you so much!!!!!!

    Remy 🙂

  • 16 Greg Atkinson // Feb 7, 2011 at 8:45 pm

    You are welcome Remy. Good luck!

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