Shares and bonds see Australia’s GDP shock in a different way

by Jonathan Adams

The worse-than-expected gross domestic product reading, which also showed annual growth in Australia is tracking below 2 per cent for the first time since the global financial crisis, is just the latest in a series of data readings that indicate the economy is worsening.

Charlie Jamieson, a bond fund manager at Jamieson Coote Bonds said, “Whist we’ve all been Trump-obsessed and euphoric, Australian data has all but collapsed”.

“We’ve got a very powerful international thematic, but on the domestic side of things our data is really poor.”

That includes the weakest wage growth ever, a disinflationary problem, a sharp slowing in building activity and disappointing private spending intentions.

“If we hadn’t been talking about Trump, we’d be talking about what the RBA would do to respond to this.”

Hugh Giddy, senior portfolio manager and head of investment research at fund manager Investors Mutual, says it’s not unusual that causality between data and the sharemarket is weak because much of the expectation is founded on economic theory that doesn’t work.

“Economic causality or data points don’t always work. If the economy is indeed weak you would think that would make you worry about bank stocks, because they are cyclical. That’s where the threat to their profit comes from, which is a big rise in unemployment,” Mr Giddy said.

Despite measurable slowdown, Mr Giddy observed that employment levels were still good. “Of course, we’ve got another housing bubble going on, a continuation of a 25-year housing bubble, and everyone seems to be in la la land that house prices can continue to rise way faster than inflation plus population growth combined,” he said.

But he said that, if the economic picture keeps deteriorating, further interest rate cuts would not help. The implied cash rate in a year’s time is 1.48 per cent versus 1.5 per cent under current RBA settings.

“If we can’t cope on interest rates as low as 1.5 per cent there’s something else wrong with the economy. We’ve got a poorly-structured tax system, uncompetitive labour perhaps in that we can’t export more; we’re over-dependent on resources to prop up our trade balance. We just don’t have the correct incentives in place, whereas other countries which have high-cost labour forces and high standards of living seem to do OK.

“We shouldn’t be lowering interest rates to try to lower the currency, rob savers and help debtors, because if you can’t pay back a loan when the base interest rate is 1.5 per cent you shouldn’t borrow the money.”

Mr Jamieson said fixed-rate borrowers in Australia already are seeing a tightening of financial conditions because the bond market sell-off has pushed banks’ cost of funding higher.

Mr Jamieson said the world has a lot of debt and much of it has been written at low interest rates, so any further advance in bond yields risks denting the price of shares and property.

“There is definitely a tipping point at which this starts to trigger a default and a deleveraging cycle. Should this continue to transpire without powerful and sustained growth, then we do get to that place.”

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