It’s a surprise seeing the Australian economy allegedly growing at 0.9% in the September quarter. I say allegedly because it’s hard to believe any official GDP figures anymore. Not when they seem so removed from reality.
They wouldn’t be out of place in an alternate universe. But back here on Earth, you’ll remember that growth plunged to 0.3% in the second quarter. Which makes the 0.9% growth for the third quarter look oddly strong by comparison. Yet in the wake of so many downbeat economic indicators, things just don’t add up.
As usual though, we might put it down to the time lag effect. When the RBA cut rates in May, there wasn’t enough time for the effects to show up in Q2 figures. But over three or four months, low cost borrowing filtered through the economy. Households borrowed more, and spent more.
So far, so good. But if these figures are correct, they’re also very limited in scope. What they’re not, most certainly, is a sign of better things to come. And I’ll explain why.
If we assume the figures are correct, then most sectors have had a positive quarterly performance.
Rising exports and mining activity were championed as the bulwarks of this resurgence. The mining sector was up 5.2% alone, after declining in Q2. Meanwhile, household consumption and government spending also rose by 0.7% each.
Yet all these figures are only useful in broader context. Take those mining figures for example. On the surface, it looks like the industry is bouncing back, doesn’t it? But a closer examination shows a different story.
For one, wages across the sector declined by 2.6% during the same quarter. What’s more, a number of projects saw completion during the quarter as well. Only problem is there’s hardly any new projects in the pipeline from hereon in.
And that’s before we even bring up the ridiculous state of company profits. Sure, profits are on the rise. But only because corporate Australia has given up on spending. Profits are up because savings remained untouched. That’s like saying your fridge is full because you’ve stopped eating.
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The world is sick
Looking at the world today, you can’t help but question where it’s heading. Few things make much sense. There are leaps in logic that are hard to understand, and even harder to explain.
Central banks speak of economic recoveries, despite little evidence to support such claims.
Yesterday, the Reserve Bank of Australia, as expected, held rates steady at 2%. It was the right decision too. Not because the economy is in tip top shape — far from it. It’s because rate policy is having little effect on the economy. It’s not lifting investment levels — the intended purpose. Companies just end up splurging savings and debt on yield hungry shareholders.
In the US, the Fed is having similar dilemmas. Only it’s weighing up whether to raise rates instead. When the Fed meets on December 15, most expect them to do just that. But in truth, the US is in no shape to start tightening credit.
Take a look at the latest manufacturing data coming out from the US. The ISM Manufacturing fell below 50, to 48.6. Keep in mind that anything below 50 indicates a contraction. It’s the first time manufacturing output has declined since 2009.
You might think that’s not a big deal. After all, isn’t manufacturing dead in the US? Actually, it isn’t. It plays a much bigger role than you’d expect.
And guess what happened the last time it fell so low? The Fed let quantitative easing (QE) loose. Then, again in 2012, the ISM dipped below 50 again. What happened? You guessed it, QE3.
As we head into 2016, the ISM is again trending below 50. Now we’re meant to believe that rates are heading up? Good one, Janet. The cronies at the Fed have strung everyone along for the whole year. It’d be nice if we all stopped listening to their every word as gospel.
But it’s get worse than that. When the Fed ended QE3 in September 2014, the ISM nosedived. From a high of 58, it dropped to 48 in the space of 12 months. Yet the US is ready for a rate lift off…
Canadian GDP slumps in September
Let’s move north of the border to Canada. Low oil prices have devastated the Canadian economy in recent months. It’s the sole reason why Canada ended up in recession in the second quarter.
In September, Canada’s economy declined 0.5%. Not since 2009 has it seen a monthly dip like that. A 0.5% decline might sound like nothing. But in the context of GDP, it’s a sinkhole.
We can learn a lot from Canada. Like Australia, Canada is a commodity exporter with a massive housing problem. And, like Australia, it’s finding the transition away from commodities tougher than expected.
The only difference is that Canada’s caught up in the geopolitical game engulfing oil. Whereas Australia’s problems stem largely from slowing demand in China.
On that front, the situation worsened overnight.
Just like the US, Chinese manufacturing declined in November. The official PMI dipped 0.2 points to 49.6. Remember, anything below 50 indicates slowing activity.
Not since August 2012 has the PMI recorded such low readings. From the ABC:
‘New orders and new export orders both fell substantially, reflecting weak demand in both internal and external sectors. Prices continued to decline, with the now entrenched deflation continuing to put pressure on profits in China’s industrial heartland.’
What’s interesting about this is that the figures reflect the ‘official’ manufacturing data. In other words, the data the government compiles. Usually, the government spruces up the figures to make them look better than they are. Not on this occasion however.
The Caixin PMI, or leading private manufacturing data, actually rose. The ABC reports:
‘[The] Caixin PMI showed a glimmer of improvement. While the Caixin PMI also reported its ninth consecutive month of declining activity, the deterioration is the weakest since June. The Caixin PMI came in at 48.6, up from a reading of 48.3 in October.
‘Staffing levels continued to decline, marking the seventh month of falling employment in China’s factories.
‘The worrying news for Australia’s resources sector is the factories reported a further fall in input prices on the back of lower raw material costs.’
That’s exactly what the likes of BHP Billiton [ASX:BHP] don’t like hearing. BHP’s had a lot on its plate in recent times. Just today the Brazilian government filed a $7.2 billion against the Samarco mine, which BHP co-owns with Vale.
Brazilian president Dilma Rousseff called it a severe punishment of those responsible. Either way, it’s no small sum. And chances are BHP won’t win that battle in court.
Sticking with Brazil, the news is going from bad to worse. Brazil’s another major commodity exporter, specialising in iron ore and soybeans. Slowing global demand has affected both commodities since the downturn began.
But the outcome has been particularly bad in Brazil. Far more than Australia in fact.
Both inflation and unemployment are rising. Inflation is trending at 10.28%. Unemployment hit 7.9% in August, which is up 3% on last year.
The latest news shows GDP tanked during the third quarter. Real GDP fell 1.7% in Q3. Worse still, Q2 figures were revised down from -1.9% to -2.1%. Brazil’s GDP is down 4.5% since last year. To call it shocking would be a disservice to how appalling the figures are.
What does all this mean for Australia? If nothing else, don’t expect 0.9% growth in Q4. Think of the third quarter numbers for what they really are — an opportunistic snapshot. Look at the broader picture instead — there’s little to remain positive over.
It’d be nice to celebrate these figures as an achievement for the economy. But they are divorced from everything that’s happening around us.
Junior Analyst, Markets and Money
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