Hello, I’m David Chau from the Finance News Network. Joining me from NAB Asset Management is Senior Economist and Portfolio Specialist, Bob Cunneen.
Bob, thanks for joining us.
Bob Cunneen: Thanks very much for the opportunity David.
David Chau: How is the Australian economy performing in 2016?
Bob Cunneen: At this stage, the Australian economy is doing reasonably well because we are transitioning after the mining investment boom. If you look at the March quarter real GDP result, the economy grew by 3 per cent, which is quite solid. It’s around the trend growth rate (so around the average growth rate). And what you saw in the components was solid consumer spending, strong housing construction, as well as favourable net exports.
Now this has offset the mining investment downturn, so this is encouraging. It shows the Australian economy is quite resilient. Now some of the recent data has been quite mixed. We’ve had softer retail sales for April and May, but that largely reflects price discounting. If we adjusted it for inflation (or the movement in prices), we could actually say that the consumer spending data in terms of retail sales has been reasonably solid.
The labour market is performing well. If you look at jobs growth for May, nearly 18,000 jobs were created, and the unemployment rate is steady at 5.7 per cent, so that’s a reasonably good number. When we look at the business surveys (eg. the May NAB Business Survey), you can see that business conditions are quite favourable. That indicates that there is considerable growth momentum in the Australian economy, so we’re doing reasonably well.
David Chau: Now onto Brexit, what will this mean for the global economy?
Bob Cunneen: Well Brexit is a concern because Britain’s decision to exit the European Union (EU) throws into doubt both European political stability, as well as British trading and investment relationships with Europe itself. The concern is that maybe the British economy will suddenly slow down. Now the most recent data indicated the British economy was growing at a 2 per cent growth rate. Now if you cut British growth from 2 per cent to 1 per cent, because of the Brexit risk, then that potentially could take 0.1 per cent off global growth. But bear in mind that global growth is averaging around 3 per cent so that’s a marginal impact.
Say we took a more negative impact to Europe itself – instead of Europe growing at 1.5 per cent, if we took 0.7 per cent off the growth rate, the impact of that on global growth might be another 0.1 of a per cent.
So really, to be negative on the global growth story, you need to have a contagion spill-over effect from Europe itself to the rest of the world. So that’s in terms of American and Chinese economic growth. Bear in mind we are only two weeks since the actual vote, and so far most of the turbulence that has been created is more in financial markets. We haven’t seen any activity data yet to say that global growth is struggling because of Brexit.
David Chau: And do you think the US Fed is done with raising interest rates this year?
Bob Cunneen: No. I think we need to be careful that, at this point in time, the Federal Reserve has decided to keep a steady hand on interest rates. But bearing in mind that the US economy is doing reasonably well (the unemployment rate is below 5 per cent), you can see that inflation pressures are gradually building up. So if you looked at core inflation on various measures they’re between 1.6 per cent and 2.2 per cent (and bearing in mind that the nominal interest rate is below 0.5 per cent), you can see that American interest rates are artificially low. So it’s inevitable that we get a rise in interest rates. The only concern I would have is partly the Brexit story, and partly the Presidential election story. The Fed may be conscious of that political risk angle bearing in mind that the Republicans in the US have been quite adamant about Fed independence.
David Chau: The Reserve Bank decided not cut interest rates but to keep them steady – what led to that decision?
Bob Cunneen: The RBA is taking a mildly positive view on Australian economic growth prospects. So they can see the recent activity data which suggests the economy is still growing at a 3 per cent growth pace. But they’re also of the view, when they look at the consumer spending (they look at the housing market in particular), the housing market in Sydney and Melbourne is quite robust. You’re seeing annual gains around 8 per cent over the past year which is very encouraging. They’ve seen the currency come down, sitting around 75 cents –
that’s providing some stimulus to the economy. So their view is maybe that monetary policy has done enough so far and that they should keep the powder dry on interest rates until necessary.
David Chau: So do you think we’re done with rate cuts for the rest of the year?
Bob Cunneen: Probably yes. You would need to have very surprisingly low inflation results for the June quarter. That comes out at the end of July. If you had an annual inflation number (say, below 1 per cent), maybe there’s a case for the RBA to cut interest rates in that environment. Or if the Australian Dollar surged (so if the Australian Dollar went closer to 80 cents against the American Dollar and therefore put some downward pressure on prices), maybe that would be the case. But I don’t think it’s a compelling case at this stage.
David Chau: Bob Cunneen, thanks for your time.
Bob Cunneen: Thank you very much.
