Aussie Economy Strengthening… But Let’s Scratch Below The Surface

Consumer confidence is up!

Retail sales for last November were up!

Statistics say employment is up!

Australia, it’s time to party like it’s 2004.

You may remember that period. The world was shaking off the bust. Meanwhile, America was in the process of blowing housing bubbles that would soon cripple the world’s markets again.

We didn’t know that yet, though. You know why? Because the US economy grew a massive 4.4% the year before. US house lending wasn’t a problem. It was a sign of market strength and individual prosperity, silly.

America wasn’t the only country expanding either. Overall global growth was 3.9%. Australia’s gross domestic product (GDP) was 3.6%, largely driven by household consumption. Which of course, was growing at the strongest pace in 30 years.

First home buyers could pick up a miners cottage in the gritty, un-gentrified inner suburbs for under half a million. The Reserve Bank of Australia set a cash rate of 5.25% — three and a half times higher than today’s rate. Inflation was running at central banker’s perfect 2.3%.

The unemployment rate was also just under 6%.

This was all before the mining boom. And before the exciting will-we-or-won’t-we-keep-this-prime-minister-for-longer-than-a-year saga to follow.

Oh yeah, life was good.

And based on the headlines I’ve been seeing lately, Australia is — statically speaking — looking strong again.

It looks like the Aussie economy is flying once more

As long as you don’t start poking holes in the data, that is.

I know, I know. I’m starting to sound like a perma bear. Never being able to accept that perhaps the good economic times are just around the corner…

But something’s off. And you don’t have to dig that far to find it.

We had some good retail data in November last year. Up 1.2% for the month. A surprise increase that was largely attributed to the release of the new iPhone.

December’s figures are still to come, but even if they’re positive, the retail sector remains gloomy. Remember, three different retailers went broke over November and December.

Then you’ve got the fact that people feel good. The Roy Morgan consumer confidence data kicked off the year at 123.5 points. The highest reading since 2013. People are expecting good things from the Aussie economy this year. 

Don’t get me wrong, there are incredible opportunities for savvy investors this year. The Aussie market has traded sideways for the past two years. But with the S&P/ASX200 above 6,000 points, it looks like the market is about to reward patient shareholders.

And let’s not forget employment. The employment rate sits at a tidy 5.5%. I’m sure you can hear the politicians congratulating each other from your home.

According to the Australian Bureau of Statistics (ABS), 75% of the working age population has a job. More folks are working than during the resource boom. Even better, this is net migration. Meaning employment opportunities are keeping up with new people moving to our shores.

Get this. Over 400,000 new jobs were created last year. That’s almost four times the 109,000 created in 2016.

Boom! Or boom times ahead.

Let’s dig a little deeper into these figures…

Turns out, about 106,000 those jobs went to construction related roles. If you live in Melbourne or Sydney, that probably doesn’t surprise you. Driving around the city streets, it feels like half the city is under construction.

Here’s where the stats get interesting.

Almost 200,000 of those new jobs created for 2017 were in public health, social welfare or education. And the majority of the health and education related roles were public ones.

That’s right. Half of the new jobs weren’t from the private sector. They were government created roles. In fact, the bean counters over at Morgan Stanley say that private sector employment has risen 2.2% compared to public at 3.5%.

According to senior economist Ben Jarman at JP Morgan, a large portion of these health related roles were created by the rollout of the National Disability Insurance Scheme (NDIS). Jarman adds that the construction of government infrastructure is at a top for now. This boost to employment data will soon fade.

Of course, now that three lots of economic data are on the up, ready yourself for the calls about higher interest rates this year.

We all ‘know’ the Reserve Bank of Australia is just waiting for wage growth to pick up. Then they can start hiking rates again to higher levels. Or pre crisis levels, as we call them now.

One of NAB’s December reports called ‘Forward View’ emphasised that the pick-up in the labour market will likely lead to wage growth.

Once the RBA sees consistent wage growth, NAB says rate hikes will commence from the second half of this year — pinning August and November as likely months. Investment bank HSBC is also predicting a rate hike to occur ‘sometime after July 2018’.

The broad consensus is that if so many new people are employed, wages should start growing soon. And if wages grow, inflation may rise. If that happens, then the RBA will be forced to increase rates again.

However, there’s one key problem. Wages won’t be going up anytime soon.

Although the data may look good, there’s much more to it than that.

I’ll show you exactly why tomorrow.

Kind regards,

Shae Russell,
Editor, Markets & Money

Shae Russell started out in financial markets more than a decade ago. Working with a derivative brokering firm, she helped clients understand derivative markets, as well as teaching them the basics of technical analysis. Since joining Port Phillip Publishing eight years ago, Shae has worked across a number of publications. She holds the record for the highest-returning stock recommendation, in which a microcap stock returned over 1,200% in six months. Ask her about it, and she won’t stop yapping on. For the past two years, Shae has worked alongside Jim Rickards as his Australian analyst, translating global macro trends for Aussie investors, and how they can take advantage of these trends. Drawing on her extensive experience, Shae is the lead editor of Markets & Money. Each day, Shae looks at broad macro trends developing around the world, combining them with her distaste for central banks and irrational love of all things bullion.

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