Australian Economic News

Mining downturn affects all resources companies...

However, on the positive side, there are winners from lower commodities prices and it will allow Central Bankers to continue to underwrite their economies.

If we focus back on Singapore, without anything under the ground then things will be worst given the perfect storm of high asset value, high leverage, high costs and never ending competition.

Good governance will help but can that be forever? Compare this to a bigger country with more diversified economic base but too much voice...

I dunno how to figure out who is the winner. All I know, I pick what I deem fits my big picture as painted by many external sources to suit my risks. That's the beauty of investments - isn't it...

GG

(18-11-2014, 08:47 AM)specuvestor Wrote: The investors and management of the business will worry ie oil and gas sector

I reckon stakeholders of Gorgon project are worrying that oil price remains low

OTOH I'm sure Aussie real estate prices will be higher than now in a century's time. But i doubt it will be comfort to those that will go through the coming correction and are highly leveraged. Nothing new under the sun as it happened to countries the size of Australia but newcomers will have to learn the cycle over again.

(17-11-2014, 08:48 PM)greengiraffe Wrote: If u referring to that posting...

Lagi no worries, low prices just leave it in the ground for future generations...

Low prices, no $ to hunt for more and simply allow demand to keep up with supplies, then price will be adjusted over time...

economics buddy - a fine balance...

No need to panick
GG

(17-11-2014, 08:38 PM)specuvestor Wrote: ^^^ ???

(17-11-2014, 02:48 PM)greengiraffe Wrote: O&G sector as a whole will face a long overdue perfect storm.

The replacement cycle has gone on for too long and with the downturn of oil & gas prices, it could always result in over-supply given that forecasts by experts and existing players may be on the optimistic side after so many good years.

What goes up must come down and vice versa... noone can defy the laws of mother nature.

Economic risks on the rise, but RBA remains cool
DAVID ROGERS THE AUSTRALIAN NOVEMBER 19, 2014 12:00AM

MINUTES from the Reserve Bank’s November board meeting observe that recent policy actions in Japan could increase capital inflows to Australia and thereby “hold the Australian dollar at a higher level than economic fundamentals imply”.

The Australian dollar has risen more than 6 per cent against the yen since Japan’s latest policy actions — which included increased asset purchases and a decision to increase the foreign equities and bonds held by the Government Pension Investment Fund — and the Reserve Bank’s trade weighted index has climbed to a 14-month high.

With the exchange rate rising, one of the main transmission mechanisms of monetary policy is becoming more restrictive at a time when mining investment is plunging and Australia’s main commodity exports are trading at multi-year lows.

Add to that the fact that the RBA’s monetary policy statement earlier this month effectively pushed out the bank’s expectation on the timing of a return to an “above trend” pace of economic growth from late 2015 to late 2016, and it’s clear that the economic risks have increased.

Interestingly enough, market pricing of the chance of an interest rate cut next July crept up to 24 per cent yesterday from 12 per cent last week, according to the overnight indexed swaps curve.

But the RBA maintains that a period of stability in interest rates is the most prudent course for now, as it expects resources exports to be boosted by a further expansion of iron ore production next year, as well as a “ramp up” of liquefied natural gas production.

It continues to expect low interest rates and population growth to continue supporting housing activity, and maintains its caution that investor loans continue to grow at a “noticeably faster rate”.

Moreover, while the RBA minutes acknowledge the prospect of Japanese capital inflows “holding” the exchange rate at a “higher level” than fundamentals imply, it doesn’t expect the current revival of the Japanese yen “carry trade” to push the Australian dollar substantially higher.

That’s a view shared by ANZ’s director of interest rate strategy, Martin Whetton. He estimates that GPIF’s additional allocations to Australia could be worth about $5 billion, not enough to materially boost the Aussie dollar, considering that additional asset allocations won’t occur all at once.

Whetton says there could actually be greater Japanese interest to sell the dollar and Australian bonds, at least in the short term, as policy holders cash in on sharp capital gains in their “Toshin” (mutual fund) investments from three years ago. He notes that some $13bn of 10-11 year supranational bonds (SSAs) were issued in 2011-12, and that the return on these policies would have increased about 40 per cent since then.

“Based on the historical knockout levels, this takes many policies into the zone where it would trigger the knockout clauses resulting in the assets being sold into the secondary market,” Whetton says.

A similar situation in early 2013 contributed to a 17 per cent fall in AUD/JPY and an 80 basis point rise in bond yields as Aussie dollar portfolios were liquidated.

“Given the historical precedent for the market, we see some risk that outflows will occur and a repeat of market conditions takes place,” Whetton says. “At best, we would expect to see a slowing in the purchases of new policies given FX and yield levels, which would be less supportive for these markets.

“For the currency, history suggests that we are at vulnerable levels; however picking the exact timing of the move is difficult. In 2013, the currency persisted above 100 for a few months, despite there being some evidence of the outflow manifesting in the Japanese flow statistics. There is some risk that this time is no different. We do not think that the recent extension of QE in Japan will provide a timely offset to the flow, just as it failed to in 2013.”

Interest rates to remain low: RBA governor Glenn Stevens
THE AUSTRALIAN NOVEMBER 19, 2014 12:00AM

Richard Gluyas

Business Correspondent
Melbourne


Houses up, rates down?
RESERVE Bank governor Glenn Stevens expects interest rates to remain low for some time yet, provided “pockets of potential exuberance” in the housing market remain in check.

At a speech to the Committee for Economic Development in Melbourne last night, Mr Stevens said the nation needed stronger growth outside the resources sector which justified the present low interest rate settings.

“Inflation is well under control and is likely to remain so over the next couple of years,” he said.

“In such circumstances, monetary policy should be accommodative and, on present indications, is likely to be that way for some time yet.

“But for accommodative monetary policy to support the economy most effectively overall, it’s helpful if pockets of potential over-exuberance don’t get too carried away.”

The RBA has been keeping close tabs on the housing industry to make sure prices and credit demand stay within reasonable bounds, with any hike in rates to burst a perceived bubble likely to choke off the transition in growth to the non-resources sector.

Official rates have been set at 2.5 per cent since August last year, which has helped drive up house prices across the country by about $100,000, or 18 per cent, since 2011.

The increase has not been uniform, with Canberra up only 6 per cent at one end of the spectrum and Sydney surging 28 per cent.

Household credit has been rising at an annual rate of 6-7 per cent, but Mr Stevens said last night he saw “no particular concern with that”.

Growth in investor credit, on the other hand, had picked up to an annualised 10 per cent over the past six months, with investors accounting for almost half of the flow of new lending.

Despite this, Mr Stevens again stressed that the Reserve Bank did not see these developments as an immediate threat to financial stability.

“By the same token, after all we have seen around the world in the last decade, it is surely imprudent not to question the comfortable assumption that it is all entirely ­benign,” he said.

This was particularly so given that prices had risen considerably in Sydney and Melbourne and were rising faster than income by “a noticeable margin”.

Further, the growth rate in investor credit was now at double digits.

Mr Stevens again hinted at the potential use of macro-prudential tools. Any reasonable observer, he said, would rightly ask in the current circumstances if some people were starting to get “a little overexcited”.

“Such an observer might want to satisfy themselves that lending standards are being maintained,” Mr Stevens said.

“And they might contemplate whether some suitably calibrated and focused action to help ensure sound standards, and that might lean into the price dynamic, may be appropriate.”

Mr Stevens said early signs of a pick-up in productivity growth had continued. Labour productivity had grown faster over the last three years than it did over most of the 2000s.

Minutes of the RBA’s November board meeting show the bank believes the slow rate of wages growth will continue to “weigh somewhat on household consumption” until 2016, when a recovery is expected.

You need more Chinese workers, says bank boss
THE AUSTRALIAN NOVEMBER 19, 2014 12:00AM

China FTA: What it means
TAS_MER_NEWS_GOVHOUSELUNCH_18NOV14Chinese President Xi Jinping. Chinese businesses and consumers are starting to focus on the detail of the FTA with Australia. Source: News Corp Australia
China FTA: What it meansTAS_MER_NEWS_GOVHOUSELUNCH_18NOV14

ONE of China’s most powerful ­financial figures has urged Aus­tralia to open its doors to Chinese workers even wider than allowed under the free-trade deal, which ­permits the import of temporary Chinese labour for infrastructure projects worth more than $150 million.

Li Ruogu, the chairman and president of the Export-Import Bank of China, added that it was important to strengthen mutual efforts against money laundering, and to improve financial super­vision. “We know a lot of corrupt officials come here to invest in real estate.”

The comments came as Chinese businesses and consumers began to focus on the detail of the FTA, which stands to deliver Australia about $18 billion in economic benefits.

Chinese business excitement built as television bulletins in China dwelt on the warmth of the Australian reception for President Xi Jinping. The Chinese Communist Party’s People’s Daily issued a commentary applauding the finalisation of the FTA between “the two Asia-Pacific giants”.

The countries had “committed to promoting Asia-Pacific regional integration and galvanising the global recovery”, it said.

Applauding the deal, Mr Li, whose bank provides massive funding support for the country’s international investment and trade, told the Australia China Economic and Trade Forum in Canberra that it provided “a new platform” for both countries.

He said he regretted Australia’s continued higher threshold for the review of investment from companies “with a so-called state- owned background”. He was warmly applauded for asking for labour ­issues to be reconsidered.

“We know it is very difficult, but if Australia can give permission for Chinese labourers to help with infrastructure construction, then the mines and other projects we both need will be completed ­quickly, and the workers will go back to China. They won’t remain in Australia. Then Australia will employ local people to work in those mines and other infrastructure. That will be good for employment, and therefore beneficial for Australia.”

Mr Li conceded this would be difficult to pass through the Australian parliament, “but Australian labour costs are too high”.

He said that in return it should be easier for Australian companies to raise capital in China, including by gaining listings on the stockmarkets. “We should all try to ­reduce the restrictions.”

He said he hoped Sydney and Shanghai would be able to co-­operate through their financial markets in the same way as Hong Kong did with Shanghai.

He urged a greater use of the yuan in trade between the countries rather than “always using a third currency” — not mentioning the US dollar.

Raymond Yu, vice-president of China Merchants, one of the world’s largest logistics corporations, said the removal through the FTA of tariffs recently imposed on a global basis would help China combat pollution, since it would help Australia to supply more competitively the “cleaner coal” that China favours.

He said that the number of Chinese companies wishing to operate in Australia would grow at “a scale well beyond the current level”.

Sun Jianxing, Australian head of State Grid Corporation, the world’s seventh-biggest company, praised Australia’s “good policies” His company would ­invest more here now, and would maintain its policy of operating in ­Australia through joint ventures, “working with partners who understand the local market”.

Queensland farmer Brent Finlay, yesterday re-elected unop­posed as president of the National Farmers Federation in Canberra, said at the meeting that, thanks substantially to the China FTA — and those with Japan and South Korea — Australian agriculture was “on the verge of a golden era”, provided farmers could capture a share of the rising export demand and prices in Asia.

Economy may take turn for the better, Westpac index shows
AAP NOVEMBER 19, 2014 10:34AM

GOOD news: the Australian economy looks like it’ll be taking a turn for the better next year.

The not-so-good news, for borrowers at least, is that the upturn should pave the way for rising interest rates.

The latest Westpac/Melbourne Institute Leading Index, which indicates the likely pace of economic activity three to nine months into the future, suggests economic growth will remain below trend into the first half of 2015.

But while the index remains in negative territory, it did pick up in October, suggesting the economy could be headed for greener pastures during the June quarter, Westpac chief economist Bill Evans said.

Mr Evans said the improved growth outlook suggested by the index was consistent with Westpac’s view of where the economy was headed, driven by expectations of a pick-up in consumer spending and non-mining investment in 2015.

That would lend support to the labour market, pushing the unemployment rate down through the second-half of 2015 to 5.9 per cent by the end of the year, he said.

The pick-up would then allow the Reserve Bank to begin hiking interest rates as early as August 2015, he said.

“Overall, we expect Australia’s growth rate in 2015 to reach an above trend 3.2 per cent despite a larger drag from mining investment,” Mr Evans said.

“Westpac expects that, with improving growth momentum in consumer spending; non-mining business investment; and the labour market, the next move in rates will be a tightening, but not until the second half of 2015, with August currently appearing to be the date for the first move.”

http://www.news.com.au/finance/business/...7128413428

Slowing the housing boom may hurt economy
1 HOUR AGO NOVEMBER 19, 2014 3:13PM

MOVES to cool investor activity in the housing market could hit the economy harder than the Reserve Bank realises, ratings agency Moody's says.
MOODY'S senior economist Glenn Levine says the RBA is relying on "outdated" data which underestimates the impact rising house prices have on consumer spending.
That means any move to cool the housing market, which has already shown signs of easing in recent months, could dampen consumer spending and the economy more than the central bank expects, he said.
"If they lift interest rates, or if they implemented some other measure that would cause house prices to flatline or fall, then that would have a larger impact on consumer demand than perhaps (the RBA) think," Mr Levine told AAP.
"This is the curse of using a blunt policy instrument like interest rates or macroprudential requirements - it will hit more people than you want it to."
The RBA has flagged regulations, known as macroprudential policy, to curb investor activity in the housing market, which has driven property prices sharply higher in Sydney and Melbourne.
RBA officials have said they will not rule anything in or out, including geographical targeting, with an announcement expected to be made before the end of the year.
Mr Levine said the RBA should wait a few months before intervening to see whether the market would continue cooling on its own.
A Moody's analysis showed house prices across Australia were close to fair value.
The only exception was Melbourne, where property appeared to be overvalued, Mr Levine said.
"If you look at Melbourne, house prices there are vulnerable, I would argue, so if the RBA implements some sort of cooling policy across the nation, house prices could easily fall there and that would have a larger effect on the consumer sector than perhaps people realise."
Mr Levine said rising wealth from housing had been supporting consumer spending, offsetting the impacts from rising unemployment and low wages growth.
"Without it, demand could be considerably weaker," he said.
A sharp downturn in house prices would likely push the Australian economy into recession, he said.

House price downturn ‘risks recession’
THE AUSTRALIAN NOVEMBER 20, 2014 12:00AM

Kylar Loussikian

Journalist
Sydney

Asset prices and consumption Source: TheAustralian
A SHARP downturn in house ­prices would probably push the Australian economy into recession, with household spending disproportionately reliant on housing wealth, according to Moody’s Analytics.

“Consumer spending has steadily accelerated over the past 12 months, yet with income and stock prices relatively flat over this period, (the study) suggests that a lot of the consumption lift is thanks to rising house prices, and that without it, demand would be considerably weaker,” Moody’s senior economist Glenn Levine said.

The Reserve Bank was “relying on outdated numbers” to calculate the correlation between consumer spending and house price rises, according to Mr Levine, with the indirect hit to consumer demand from slowing house price growth larger than expected.

David Sokulsky, head of investment strategy at UBS Wealth Management, said he generally agreed that Australian householders were overexposed to property, and a decline in house prices represented a risk.

“If there is a housing downturn, then the banks and banking sector will also be hit considering their exposure to the mortgage market,” Mr Sokulsky said.

“Interest rate increase would be key for any price decline, and that would likely have a negative impact on consumption. The question is by how much and we obviously don’t know that.”

Housing accounts for 55 per cent of gross household assets, compared to shares, which account for 27 per cent, and other ­financial assets responsible for the remaining 18 per cent.

In comparison, housing accounts for 25 per cent of household wealth in the US.

“As housing wealth is twice as large as equity wealth in Australia, the result suggests that consumer demand is around four times as sensitive to a 1 per cent change in house prices as it is to stocks,” Mr Levine finds.

Mr Sokulsky said the strength of the Australian dollar would be a significant factor in offsetting the impact of lower house price growth.

“If we have the economy growing and the Australian dollar ­depreciates, then economic growth and wage and consumption increase as a result will probably offset any decrease in consumption from the housing market decline.”

Moody’s modelling suggests that if the RBA adopted a hawkish approach to interest rates, increasing them mid-next year, consumer demand would fall by 1.3 per cent, instead of 0.4 per cent implied from RBA wealth effect modelling.

Don't understand the logic... with real estate being relatively illiquid, shouldn't consumption be linked to income (or any consistent inflow of money)? It's like saying your investment property went up in valuation and u went to buy your wife a fancy handbag -_-?

I'd think it's more connected to immigration since unlike the generic immigrant in Singapore (where they are here for job prospects/scholarships), they are generally more well off and can afford to spend regardless of income/job opportunities.

They can release equity, redraw their principal. Feeling rich adds to increased consumption

Yeah... that's a possibility... but for it to affect the overall consumption, seems rather dubious no?

Then again that's just a mental experiment on my part... nothing concrete