Winter is here and we are almost to the end of another financial year. And what a year it’s been! With so many Australians impacted by fires, floods, drought and now COVID-19, let’s hope the new financial year sees a return to something like normality.
As May unfolded, hopes grew of economic re-opening. Reserve Bank Governor Philip Lowe told a Senate Committee on COVID-19 the economic downturn was less severe than feared due to Australia’s better than expected health outcomes and government stimulus and support. However, he stressed: “It’s very important we don’t withdraw fiscal stimulus too early”. Unemployment rose from 5.2% to 6.2% in April, but without JobKeeper support payments it would have been closer to 9.6%. The value of construction work fell 19% in the March quarter, 6.5% over the year, highlighting the need for government stimulus. New business investment in buildings and equipment also fell 6.1% in the year to March, although mining investment bucked the trend, up 4.2% in the March quarter. This was reflected in our record trade surplus of $77.5 billion in the year to April, despite a drop-off in imports and exports in April.
After a wave of panic buying in March, retail trade fell a record 17.9% in April, but consumer confidence is on the mend. The ANZ-Roy Morgan weekly consumer confidence index rose 8 weeks in a row to the end of May, up a total of 42% from recent lows to 92.7 points. As the global economy slowly re-opens and demand improves, iron ore prices rose 15% in May while crude oil was up 77%. Australian shares bounced back by around 5% in May, while the US market rose 3%. The Aussie dollar traded higher on our improved economic outlook, closing the month around US66.4c
The Morrison Government’s mind-bogglingly large support packages to get Australians through the COVID-19 shutdown have dominated headlines, and rightly so. Only months ago, the Australian economy was in relatively good shape and headed for a Budget surplus.
It’s not just the Government that has swung into action. Behind the scenes, the Reserve Bank of Australia (RBA) has also pulled out all stops to keep the economy moving.
RBA monetary policy is the yin to the Government’s fiscal policy yang. During the current crisis it’s designed to complement, and to some degree pay for Government spending which already exceeds $320 billion.
On March 19, RBA Governor Philip Lowe announced a package of monetary support policies to “support jobs, incomes and businesses”. These policies included maintaining the cash rate at 0.25 per cent, the creation of a $90 billion funding facility to support business lending, and the purchasing of government bonds.
Rates as low as they will go
Australia began 2020 with the official cash rate at what was an historic low of 0.75 per cent. This left little wiggle room for the RBA to provide further economic stimulus the traditional way, by pulling the interest rate lever.
After two rate cuts in March, the cash rate is currently at a new all-time low of 0.25 per cent. The RBA has promised to keep it there until “progress has been made towards full employment and it is confident that inflation will be sustainably within the 2-3 per cent target range”. With unemployment expected to hit double digits we could be waiting for some time, although inflation jumped to 2.2 per cent in March. i
Increased funding for SMEs
While low interest rates traditionally encourage individuals and businesses to borrow and spend, there’s less inclination to do either while the Coronavirus shutdown continues.
The prospect of some business failures and loan defaults is also a disincentive for the banks to lend. So the RBA has provided a three-year funding facility for the banks at a low fixed rate of 0.25 per cent to reduce their funding costs and encourage borrowers.
The banks will be able to access this funding if they increase lending to business, especially small and medium-sized businesses which have been especially hard hit by the shutdowns.
Bond buying bonanza
The cash rate is not the only interest rate the RBA monitors. In its March statement it also set a target for the yield on 3-year Australian Government bonds of around 0.25 per cent, in line with the cash rate.
This was a signal to the market that the central bank is serious about keeping rates lower for longer. At the time 3-year Government bond yields were around 0.85 per cent.
The RBA set out to achieve this target by buying Government bonds in the secondary market. This is a monetary policy lever it has never used before, known as quantitative easing.
If you haven’t heard of quantitative easing – QE for short – or you have but you can’t get your head around it, you’re not alone.
How does quantitative easing work?
QE is where central banks print money to buy government bonds. A government bond is a low risk investment product whereby investors lend money to the government for a set period at a predetermined rate of return which is referred to as the yield or interest rate.
When the RBA enters the secondary market to buy billions of dollars of government bonds, it effectively gives the Government a lot more cash to spend and this money flows through the economy.
The RBA’s bond buying also raises the price of bonds and lowers their yields, which in turn lowers funding costs for borrowers and allows them to cut interest rates on home loans and business loans. Coupled with low interest rates, banks are better off lending money than holding onto it.
To date, the RBA has spent more than $36 billion in bond purchases and 3-year Government bond yields have dropped to around 0.25 per cent.ii So, by spending huge quantities of cash the RBA eased monetary policy, which is a roundabout way of saying it used quantitative easing.
What does it mean for me?
The prospect of low interest rates for the next few years creates opportunities and dilemmas for borrowers and investors.
As banks pass on some or all the cuts in official interest rates to their home loan customers, first home buyers are well-placed to secure a good deal. Existing homeowners might also take the opportunity to refinance.
According to Canstar, by shifting from the average variable interest rate of 3.52 per cent to the lowest rate on offer of 2.39 per cent, a borrower on a 30-year, $400,000 loan could save more than $240 a month or more than $87,400 over the life of the loan.iii
Retirees and others seeking income from their investments are not so lucky, but there are some good rates on offer if you are prepared to shop around. The best 12-month term deposit rates and bonus savings account rates are as high as 2 per cent.iv, v
These are undoubtedly difficult times, but the decisions you make now could put you in a good position when markets recover. So give us a call to discuss your financial situation.
It’s September and spring is in the air. It’s time to shake off the winter cobwebs, get out into the garden or the great outdoors. It’s also a good time to plan your summer break.
August was a challenging month for investors. Global markets reacted negatively to an escalation in the US-China trade war and the looming no-deal Brexit. US economic growth slowed to an annual rate of 2 per cent in the June quarter, down from 3.1 per cent the previous quarter. China’s economy is also slowing – industrial production, retail sales and fixed asset investment all recorded lower growth in the year to July.
To stimulate the US economy, the US Federal Reserve cut rates by 25 basis points, the first cut since 2008. US short-term bond yields rose as did the US dollar, but shares fell around the globe. In the US, shares were down around 2 per cent for the month while Australian shares shed 3 per cent. The Hong Kong market fell more than 7 per cent as protests continued and UK shares fell 5 per cent on Brexit worries.
In Australia, most companies reported positive earnings for the 2019 financial year, but only a little over half managed to lift profits. One challenge is retail spending, up 0.2 per cent in the year to June, the weakest in 28 years. The NAB business confidence index rose in July, but the business conditions index fell to 2.4 points (the long-term average is 5.8 points).
On the bright side, Australia’s trade surplus hit a new record high of $49.9 billion in the year to June. The Australian dollar finished the month lower at around US67c, which should support our exporters.
It’s August and we are into the final month of an unusually balmy winter, after a record run of high temperatures for July in many states. Financial markets have also been running hot with new records set.
Global sharemarkets were riding high in July, fueled by higher than expected US growth, rising expectations that the US Fed would cut interest rates this month and hopes of further China-US trade talks.
On the flip side, global bond yields fell to record lows. Australian 10-year government bonds currently yield 1.21 per cent, down 1.45 per cent in 12 months.
The US S&P500 share index hit a new record high in July while Australia’s All Ordinaries Index and ASX200 finally broke through their 2007 record highs set before the GFC. Australian shares were also buoyed by the second cut in official interest rates in as many months, to a new low of 1 per cent. Rising iron ore prices (up 72 per cent in 12 months) and further falls in the Aussie dollar to below US69c also helped boost our export sector.
Australia’s trade surplus rose to a record high of $5.75 billion in May, including a record surplus with China. But in a worrying sign, China’s economic growth fell to an annual rate of 6.2 per cent in the June quarter, its weakest in 27 years.
The International Monetary Fund (IMF) lowered its forecasts for global growth to 3.2 per cent in 2019. If accurate, this would be the slowest growth in 10 years. This is reflected in Australia’s inflation rate; the Consumer Price Index rose to an annual rate of 1.6% in the June quarter, better than the 1.3% reading in March but still stubbornly below the Reserve Banks 2-3 per cent target.
It’s November and, as always, the month gets underway with the race that stops the nation. The Melbourne Cup is also the signal that summer, Christmas and the holiday season are just down the track.
October was an anxious month for investors as global share markets followed Wall Street’s wobble before steadying in the final days. The S&P 500 Index fell 7 percent in October while the ASX 200 fell more than 5 percent. There was no major reason for the falls. The US economy grew at an annual rate of 3.5 percent in the third quarter and corporate earnings are strong. But there are ongoing concerns about the US-China trade war and rising US interest rates.
The Australian dollar finished the month 1.6 percent lower at around US71c. This is good for trade, as is the 10 percent rise in the iron ore price in October to US$76.50 a tonne. Local unemployment fell to a six-year low of 5 percent in September, while inflation fell below 2 percent. The September quarter Consumer Price Index rose just 0.4 percent for an annual rate of 1.9 cents, down from 2.1 percent in June. Prices of accommodation, tobacco, property rates, and petrol bucked the downward trend. The national average price of unleaded fuel recently hit 160.6c a litre, the highest in a decade. But relief for motorists could be in sight as the price of Brent Crude oil fell 11 percent in October to US$75.57 a barrel. Consumer sentiment fluctuated, with the ANZ-Roy Morgan consumer confidence rating dipping 6 percent mid-month before rebounding to 114.6, above the long-term average.
The Australian economy grew by 0.9% in the June quarter 2018, according to the ABS.
However, GDP growth per capita was only up by 0.5% over the quarter. GDP growth per capita is important because it is what drives increases to living standards.
RBA warns of household debt risks
High levels of risk exist across both bank and household balance sheets, as Australia has some of the highest levels of debt-to-income internationally, RBA assistant governor, financial system, Michele Bullock warned. Australia’s median debt-to-income ratio increased from 70% in the 1990s to around 190% today.