June quarter real GDP growth slowed to an annual 1.4%, the lowest since the 2008 global financial crisis (GFC). Major contributors to growth are household consumption, public demand and exports; while the biggest handbrake is investment.
A quick look at the RBA chart shows that consumption is slowing but at a slower rate than disposable income. Households are dipping into savings to support consumption, with the savings ratio (savings/disposable income) declining to near GFC lows.
Gerard Minack warned of the danger that households will dramatically increase savings, and cut consumption, if employment prospects grow cloudy.
That brings us back to investment. Low investment is a drag on employment growth.
Low interest rates, on the other hand, are a tailwind at present. They seem to have shored up housing prices,
And states are taking advantage of ultra-low interest rates to boost infrastructure spending.
But low interest rates are a double-edged sword. Bank net interest margins are under pressure.
And credit growth is plunging.
The housing recovery will be short-lived if there is not a dramatic increase in loan approvals.
AMP chief economist Shane Oliver believes that:
“growth will remain soft and that the RBA will have to provide more stimulus – by taking the cash rate to around 0.5% and possibly consider unconventional monetary policy like quantitative easing. Ideally the latter should be combined with fiscal stimulus which would be fairer and more effective. While Australian growth is going through a rough patch with likely further to go, recession remains unlikely barring a significant global downturn.”
But that ignores two factors:
- increased pressure on bank net interest margins from lower interest rates; and
- the elephant in the room: China.
China’s economic model is built on a shaky foundation and trade war with the US is likely to expose the flaws.
Chinese leaders are growing increasingly worried about the economy. Premier Li Keqiang said at this week’s State Council meeting:
“The current external environment is increasingly complex and grim.
….Downward pressure on the domestic economy has increased.”
BEIJING, Sept. 5 (Xinhua) — Chinese and U.S. chief trade negotiators agreed on Thursday to jointly take concrete actions to create favorable conditions for further consultations in October.
The agreement was reached in a phone conversation Chinese Vice Premier Liu He, also a member of the Political Bureau of the Communist Party of China Central Committee and chief of the Chinese side of the China-U.S. comprehensive economic dialogue, held upon invitation with U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin. (Xinhua)
…Extend and pretend. Neither side wants a full-blown trade war. But they are miles away from an agreement.