Australia’s Economy – The Twisted Tale

Next to property, a favourite topic among analysts is figuring out when the Reserve Bank of Australia (RBA) will raise the cash rate. There are even odds offered through betting agencies.

In case you were wondering, betting agents seem to favour a rate increase ($1.40) over a rate cut ($2.80).

Big international banks — while not betting on the rate rises — are coming out with their predictions too as to when the RBA will lift rates from the record low of 1.50%.

In August, Goldman Sachs economist Andrew Boak predicted rates would increase sooner rather than later. In spite of slow wage growth, persistent low inflation and a strong Aussie dollar, Boak reckons the RBA is one step closer to increasing the cash rate, saying:

Given the RBA’s increasing optimism on the macroeconomic outlook, we think we are closer to higher interest rates than the market is anticipating, particularly if house prices keep re-accelerating and credit growth outpaces household incomes.

Last week saw the release of the latest gross domestic product data (GDP). Leading some analysts to believe that a rate hike could be on the cards as early as next year.

Official GDP data suggests the Aussie economy grew by 0.8% for the June quarter. Bringing year-on-year growth to 1.8%.

Yesterday, the Australian Bureau of Statistics (ABS) announced that the Aussie economy added 22,000 full times jobs, and another 6,000 part-time jobs in August this year. In the past 12 months, official data suggests we’ve added a total of 253,000 full-time jobs.

However, like all things too good to be true, these figures probably are too. The reality is very different.

Things start to fall apart when you break down the GDP figures to allow for population growth. Factoring that in, the June quarter now show an 0.4% growth. And year-on-year growth comes down to a lousy 0.2%.

Furthermore, unofficial statistics suggest the real unemployment figure in Australia is more than double what the ABS claims.

Independent research firm Roy Morgan has the Aussie unemployment rate sitting at a yearly high of 10.2%, and underemployment — people who work less hours than they want to — at 9.5%.

That’s an astounding difference. The reason? Methodology. Using stats to tell the story they want, rather than the way it is.

Roy Morgan keeps the unemployment calculations simple:

The Roy Morgan Unemployment estimate is obtained by surveying an Australia-wide cross section by face-to-face interviews. A person is classified as unemployed if they are looking for work, no matter when. The results are not seasonally adjusted and provide an accurate measure of monthly unemployment estimates in Australia.

The ABS, on the other hand, has a different approach:

‘The ABS classifies a person as unemployed, if when surveyed, they have been actively looking for work in the four weeks up to the end of the reference week and if they were available for work in the reference week.

The ABS classifies a person as employed if, when surveyed, a person worked for one or more hour during the reference week for pay, profit, commission or payment in kind, or even if a person worked for one hour or more without pay in a family business or on a farm.

That’s right. When working without pay in a family business or on a farm counts as ‘employment’, that goes some way to explaining the distortion between the two.

The problem is that central bankers favour official statistics. When you tweak and manipulate data to suit your agenda, the government has a much rosier outlook.

Yet everyday life doesn’t match up with what the stats tells us. Vern Gowdie, editor of The Gowdie Letter, pointed this out last week. Instead of the Aussie economy humming along and growing, he says it’s more a case of debt growing, rather than the economy. He notes:

Make-believe employment numbers create a make-believe world. One that deludes us into thinking our economy is a miracle…when in fact it’s a mirage.

The ABS tells us that our $1.7 trillion economy “grew” by 0.8% in the second quarter…expanding by $136 billion.

But did households spend their savings or go deeper into debt?

That’s the story behind our miracle economy. We’re just going deeper and deeper into the brown stuff and being told it’s a bed of roses.

Our recession-free run is completely contingent upon Australian households’ willingness and ability to increase their debt-loads. Once households reach debt fatigue — and they will — our economy will go from “hero to zero” very quickly.

As the forecasts — and the bets — are being placed, an RBA board member has hosed down any idea that a rate increase is on the cards.

One Aussie central banker likened the Aussie economy to an underperforming high school student, saying Australia is operating ‘below its potential’.

The RBA’s Ian Harper told Bloomberg in a phone interview yesterday:

As well as we’re doing, the Australian economy is still operating below its potential. So long as that is the case, why would anyone be suggesting tightening monetary policy when the economy is operating below potential? I mean hello?

However, Harper pointed out what I’ve suspected for some time. What matters most to the RBA isn’t wage growth. And it’s not house prices. It’s how much money we are spending. He adds:

Consumption is two-thirds of gross domestic product. If households as a group were suddenly to decide that we really can’t afford this now, we’re going to start to slow up consumption to keep ourselves on an even keel, then that will certainly pull GDP growth away from where we want it to be.

But the important take away here is that rates aren’t going up. Not anytime soon.

Largely manipulated official statistics aren’t telling the full story on how the Aussie economy is performing.

Settle in folks. Low rates are here to stay.

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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