Chief economist update: The turn in Australia's cycle from vicious to virtuous

"Such a feelin's comin' over me
There is wonder in most everything I see..."

- Karen Carpenter

Not long now - just less than a percentage away (0.8% to be exact) - and the All Ordinaries index would top the all-time high of 6,853.57 points it reached on the 1 November 2007. It closed at 6,800.86 points at the end of yesterday's trading - up by 20.9% and outperforming both developed equity markets (17.6%) and emerging equity markets (10.8%) this year to date.

"There is wonder in most everything I see."

The upward momentum in Australia's benchmark certainly makes one wonder especially given the downdraft from slowing global growth momentum (led by the inverted US yield curve's signalling a recession in America) and lingering uncertainties - wars (trade, currencies, tech, nuclear), the still unresolved issue of Brexit and Trump, among others.

The domestic economy is none too good either - so much so the Reserve Bank of Australia (RBA) has had to deliver back-to-back reductions in the official cash rate from 1.5% to 1.25% (in June) and to 1.0% (in July), with financial markets expecting at least one more rate reduction going forward.

Latest economic releases both underscore and justify the RBA's decision. Australian retail sales increased by a mere 0.1% in May - half market expectations for a 0.2% increased and merely negated the 0.1% decline in the previous month. More telling, the annual growth in retail spending slowed to 2.4% in May from 2.8% in April from 3.5% in March.

The Australian Bureau of Statistics (ABS) also recently released its "Job Vacancies" report, telling us, Australians all, to forget asking for a pay increase. Job vacancies fell by 1.1% in the May 2019 quarter after gaining 1.2% each in the previous two quarters. The ABS report is consistent with the 14.9% drop in the ANZ job advertisement series in the year to May (from 5.6% in April).

Both reports point to continued weakness/weakening in Australia's labour market and by extension, lesser impetus for domestic consumers - them that make up around 60% of the economy -- to go forth and spend.

But hey, the stock market is forward-looking. It has discounted all these negatives and is looking forward to the positives resulting from the RBA's rate cuts and more recently, the passage of the Morrison Government's tax rebates.

Especially the Morrison government's tax rebates. According to an article by the Sydney Morning Herald (SMH) published on July 4: "Deloitte Access Economics director Chris Richardson said the initial tax refunds would act much like the stimulus cheques mailed out by the Rudd government during the depths of the global financial crisis in February 2009."

"On that occasion, cheques of $950, worth a combined $8.1 billion, were mailed out over a short period of time, boosting the struggling retail sector which reported a 2.6% jump in sales in March 2009.

Richardson said the $1080 boost for low and middle income earners, worth a combined $8 billion, would act in a similar way, with the nation's retailers set to be the biggest beneficiaries."

I agree.

Working hand-in-hand, the RBA and the government might - nay, scratch that - will be able to turn Australia's vicious cycle into a virtuous one.

Already we're seeing a deceleration in the rate of decline in property prices. This, together with the on-going rally in the equity market, should turn wealth effect from negative to positive.

Which begs the question, does Australia need another one (or two) more rate cuts?

Read more: USJobMorrisonReserve Bank of AustraliaAll OrdinariesAmericaANZAustralian Bureau of StatisticsAustraliansBrexitChris RichardsonDeloitte Access EconomicsKaren CarpenterMr RichardsonRuddSydney Morning HeraldTrump
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