The ASX is breaking records, but that doesn’t mean the economy is in good shape

Why am I sending you an article on the stock market in Australia? Because at $1.9 trillion in size it still a large part of the investment market, with residential investment housing still dwarfing it at $5.5 trillion dollars.

Article republished from ABC News.

Looking at the stock market and the residential housing market they are being driven by record low-interest rates, which as a borrower you are seeing the affordability of investing increase due to unseen rates given and charged by banks, and as a depositor the super low rates are jolting people into actively looking for better avenues of gaining higher returns with a physical possession.

This week’s GDP numbers will, as usual, be spun in a couple of ways.

For the glass-half-full brigade, year-on-year growth will tick up from the post-global-financial-crisis-low shocker of 1.4 per cent in the June quarter, thanks largely to the weak 2018 September quarter dropping out of the calculations.

Put another way, September quarter growth this year would have to come in at 0.2 per cent or worse for things to slow further – and even the grizzliest bear hasn’t forecast that.

Those staring at a half-empty glass will likely see not only more of the same, but any semblance of growth steadily draining away.

From what the Australian Bureau of Statistics has published so far, retail trade volumes will be a drag, private sector capex too – particularly given the surprise fall in machinery and equipment investment – and dwelling investment will also chip away at the bottom-line GDP figure.

Net exports will offset the falls to some extent, as will government spending – although that impact is diminishing – and quite possibly an inventory build-up will help too.

However, mounting inventories are not necessarily considered “quality” growth.

1. Growth is slowing

NAB’s forecast is a slightly below consensus 0.3 per cent over the quarter, or 1.5 per cent year on year.

On that basis, whatever growth there is can be largely attributed to an expanding population, growing at 1.6 per cent.

NAB chief economist Alan Oster says there is likely to be a marginal slowing from the growth rates seen in the past two quarters and a continuation of the weakness seen over the past year.

“Our view is that consumption growth is unlikely to see a significant recovery given the constraints of low-income growth and high debt levels,” Mr Oster said.

Mr Oster points out the weakness in domestic demand continues to be a household story, with consumption growth remaining weak – retail volumes are plumbing the depths last seen in the early ’90s recession – and the decline in dwelling investment is ongoing, despite a recent pick up in house prices.

We remain less optimistic than the RBA that growth will return to trend and that there will be an improvement in the unemployment rate.’’

The latest RBA forecasts imply GDP growth should be around a solid 0.6 to 0.7 per cent over the quarter if it is to meet its expectations that “economy is at a gentle turning point”. That’s unlikely. It is perhaps the RBA’s optimistic forecasts, rather than the economy, that are closer to a turning point.

2. Rates on hold

A really dire GDP figure won’t affect the RBA’s decision at Tuesday’s board meeting, given, as usual, the quarterly National Accounts are published the day after a rate-setting meeting.

Playing slightly behind the beat may be clever in jazz, but it is more difficult to comprehend in monetary policy.

The economic news of late – particularly the very sensitive areas of jobs and wages – has been poor, but not so poor as to divert the RBA from its “wait and see” stance over summer.

The market has priced in only a 10 per cent chance of a cut on Tuesday.

As the board’s last set of minutes noted, given it had already delivered “substantial monetary stimulus (three cuts in recent months) … there was a case to wait and assess the effects of this stimulus, especially given the long and variable lags”.

ANZ’s David Plank said there’s no reason to think the RBA has changed its mind over the past four weeks.

“October employment data were weak and the private capex, in terms of both the Q3 result and forward expectations, disappointing, but the lag between policy and impact supports the case for waiting until the RBA updates its forecasts in February.

“Also there has been no additional data on household spending since the November meeting and there won’t be until after the December meeting.”

3. Don’t tell the ASX the economy has stalled

While the economy is flatlining, the same cannot be said for the equity market, with the ASX continuing what has been a sneaky three-month rally.

Sure, retail may be withering away – another big fashion chain, Bardot, went into administration last week – business and consumer confidence hardly robust, the banks still seem to harbour capital-destroying secrets and the potential resumption of a trade war hardly makes the miners a risk-free investment, but what the heck, buy some shares.

As French Field Marshal Ferdinand Foch is quoted as saying before the first Battle of the Marne in 1914: “My centre is yielding. My right is retreating. Situation excellent. I am attacking.”

Investors have taken that advice with gusto, and it is reasonable to remember Foch did eventually prevail after a fair bit of blood was shed.

Last week, the ASX200 pushed above the previous high, hit at the end of July, which in turn beat the previous record set before the financial crisis hit back in late 2007.

The local market to a large extent is hitching a ride on the fortunes of US equities, supported by strong recent gains in local healthcare (think CSL surging towards $300 a share), energy, telco and tech stocks.

AMP strategist Shane Oliver says while problems with trade, weak global economic data and US politics will continue to bubble away and volatility will be an ongoing theme, overall the rally doesn’t looked over-cooked.

Valuations are OK – particularly against low bond yields. Global growth indicators are expected to improve through next year and monetary and fiscal policy are becoming more supportive, all of which should support decent gains for share markets on a six to 12 month horizon,’’ Dr Oliver said.

4. Markets take a breather