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The RBA is wrong on rates
NaN of
[img=620x0]http://www.afr.com/content/dam/images/g/k/5/b/j/k/image.related.afrArticleLead.620x350.gk452e.png/1444370942076.jpg[/img]Guy Debelle: "The government bond yield is still doing a pretty good job." Daniel Munoz
[Image: 1435297743626.png]
by Christopher Joye
Should we be worried about bond yields which are, in Glenn Stevens' words, "in all likelihood the lowest ever in human history"?
Three of the smartest guys at the Reserve Bank of Australia think not. Stevens himself, who concedes the RBA cannot accurately forecast the future, projected for Parliament that "it seems very likely global interest rates will still be quite low for quite some time yet".
The RBA's head of economics research, John Simon, dedicated an entire speech this week to arguing that cheap credit is neither predictive of financial crises nor anything to lose sleep over.
"Once again, one must ask, why are people so concerned about low interest rates?" he asked, concluding, "Low interest rates are a poor indicator of future problems and, given currently weak global growth, entirely appropriate."
[img=620x0]http://www.afr.com/content/dam/images/g/k/5/c/b/2/image.imgtype.afrArticleInline.620x0.png/1444362108623.png[/img]
Comforting stuff.
A month earlier fellow MIT PhD Guy Debelle questioned whether "the government bond rate [is] still the appropriate risk-free yield". I've dedicated many column inches to explaining how efforts by policymakers to suppress government bond yields through tens of trillions of dollars of asset purchases have artificially reduced risk-free rates, which investors use to discount cash flows back to the present. By leaning heavily on the short- and long-term price of money, governments have boosted the value of all assets, including shares, bonds and housing.
Yet Debelle reckons this is no big drama. "The risk-free yield should approximate the growth rate of the economy," he says. "On that basis, the government bond yield is still doing a pretty good job."
The empirical pattern had certainly been one where, before the introduction of quantitative easing (QE), long-term rates tended to reflect the economy's sustainable growth pulse.
[img=620x0]http://www.afr.com/content/dam/images/g/k/5/c/m/i/image.imgtype.afrArticleInline.620x0.png/1444362354026.png[/img]
The problem is that Australia's 2.7 per cent 10-year government bond yield is way below estimates of "trend" growth. Even if we assume that the new normal for trend real GDP growth is, say, just 2.5 per cent (that is, much weaker than the usual threshold of about 3.25 per cent) because of slower population and productivity growth, you still get trend nominal growth of 5 per cent after adding back core inflation.
That's almost double the prevailing 10-year risk-free rate, which implies market pricing is off and far removed from the 6 per cent yield that has held on average since 1993.
Debelle rejects the proposition that central banks' "extraordinary" bond purchases have biased risk-free rates and propagated irrationally inflated asset prices in markets that are not clearing. "Again, I don't see these purchases as distorting the Australian government bond yield, but rather reflecting the reality of the world we live in," he says.
An indirect RBA case for this "low rates for long" meme has also been made by Peter Tulip, who works under Simon in the economics research area. Readers might recall that after alleging Australian housing was "fairly valued" in April 2014, Tulip revealed in July 2015 that it had become "30 per cent undervalued". He reiterated the assertion several times, explaining that "the undervaluation of 30 per cent is unusually wide – the widest in at least 30 years".
After double-digit house price growth between 2013 and 2014, how could Australian bricks and mortar have suddenly become less expensive? "What has changed since [April last year] is that real long-term interest rates have fallen substantially," Tulip clarified. "That fall made housing more attractive relative to renting, despite the increase in prices."
The 10-year bond yield had slumped by about a third (or more than five RBA rate cuts). That had a huge impact on Tulip's valuation estimates because he used this yield to benchmark projected borrowing costs.
'PRICE OF MONEY FAKED'
Matthew McLennan, an Australian who runs $80 billion at First Eagle in New York, says that "the price of money has been faked through central banks cutting interest rates to artificially low levels". McLennan characterises the "yield curve in the US is a seriously distorted entity" as a result of QE and asks: "How can you expect to have a proper allocation of scarce capital to its most productive purpose when the price of the money has been faked?"
Yet the RBA's Simon contends that the central bank's easy monetary policy settings are "entirely appropriate". In contrast to McLennan, he does not think that record-low rates will skew savings and investment decisions in a way that causes imbalances. "Low interest rates are implicated in the formation of property and financial bubbles," Simon acknowledges. "People think that low rates are associated with greater asset price, and hence financial, volatility. But looking at the breadth of history suggests there is no particular link between interest rates and financial or asset price instability."
He maintains that "there are many periods when interest rates have been low and excessive risk taking has not occurred. Indeed, low interest rates have been a more common feature of the financial system over time than high interest rates – which are very much an aberration related to the 1970s and their aftermath."
Simon neglects to mention four fundamental, and interrelated, differences between the world today and that which prevailed before the 1970s: the removal of the "gold standard" and the introduction of non-asset-backed "fiat money" underwritten only by the credibility of governments; the surge in public- and private-sector debt since that time; the arrival of sustained consumer price inflation (now actively fostered by policymakers), mostly absent before the 1970s; and the establishment of central banks for the purpose of guaranteeing the liquidity of highly leveraged (read fragile) private banks and the development of "risk-free" funding via deposits, which has radically multiplied the quantity of money and credit throughout the economy.
It is spurious to suggest that the paucity of links between low rates and financial crises before the 1970s, when there was scant private debt, means that the orders-of-magnitude-higher debt levels today coupled with even cheaper money is A-OK. You cannot divorce prices from quantities: interest rates are simply the cost of borrowing credit.
One of the main reasons there was much lower credit creation by banks before the 1970s was because currencies were tied to commodities (commonly via the gold standard) and "fiat" money, or currency that derives its value from political assurances, was not the norm. In 1973 an ounce of gold was worth US$42. Today the same gold costs US$1145.
Every single documented high-inflation episode has correlated with governments discarding asset-backed money and using their monopoly over the printing press to manufacture vast volumes of costless fiat currency to finance burgeoning budget deficits. This, incidentally, is what is happening today. Beyond central banks printing fiat money to buy public bonds, we have had the more subtle development since the global financial crisis whereby banks are required to hold much larger quantities of "liquid assets" in the form of government bonds. In Australia alone banks have to buy $195 billion of government bonds, which further inflates prices and suppresses yields.
Celebrated academics Carmen Reinhart and Kenneth Rogoff showed in 2013 that sustained consumer price inflation only emerged in the second half of the 20th century following the embrace of fiat money: "[historically] high inflation was . . . a relatively rare phenomenon associated with wars and their immediate aftermath". In 1913 consumer prices "were only about 20 per cent higher than in 1775 and around 40 per cent lower than in 1813".
They argue that inflation has been "dominated by the abandonment of the gold standard in 1933 and the adoption of fiat money subsequently. One hundred years after its creation, consumer prices are about 30 times higher than what they were in 1913."
Fiat money combined with central-bank-backed banks that can source more (government-guaranteed) funding more cheaply than other businesses has fuelled explosive credit creation. This is illustrated by comparing money defined as "M1", which is physical currency, with money known as "M3", which is currency plus deposits (noting also that deposits lead to loans). In 1959, M3 was 8.7 times the size of M1. After exponential growth since the 1970s, M3 is now 28 times M1. Alongside declining interest rates during the 1990s, bank-driven credit creation has pushed household debt from 63 per cent of disposable incomes in 1988 to 186 per cent today.
Simon thinks 3.9 per cent home loan rates are no big deal because "credit growth is generally low". In August the RBA reported that credit had expanded at a "modest" 6 per cent annual pace. Yet judging credit growth in isolation to the quantity of credit and incomes is meaningless. Credit growth is running four times faster than wage growth and twice the rate of national incomes. Given that the debt-to-income ratio is at an all-time high, that sounds worrying to me.
This muddling may be a function of the RBA's mixed mandate. It has the tricky task of being responsible for price stability, full employment and financial stability, when these goals frequently conflict. It has justified slashing rates to support employment, yet ended up blowing a mega-housing-bubble. Institutionally resistant to self-criticism, it now claims houses are cheap, rising debt-to-income ratios are sustainable, and interest rates are "appropriate".
Investors need to recognise the RBA could be wrong.
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- OPINION
- Oct 9 2015 at 3:18 PM
- Updated Oct 9 2015 at 5:09 PM
The RBA is wrong on rates
NaN of
[Image: 1444370942076.jpg]Guy Debelle: "The government bond yield is still doing a pretty good job." Daniel Munoz
[Image: 1435297743626.png]
by Christopher Joye
Should we be worried about bond yields which are, in Glenn Stevens' words, "in all likelihood the lowest ever in human history"?
Three of the smartest guys at the Reserve Bank of Australia think not. Stevens himself, who concedes the RBA cannot accurately forecast the future, projected for Parliament that "it seems very likely global interest rates will still be quite low for quite some time yet".
The RBA's head of economics research, John Simon, dedicated an entire speech this week to arguing that cheap credit is neither predictive of financial crises nor anything to lose sleep over.
"Once again, one must ask, why are people so concerned about low interest rates?" he asked, concluding, "Low interest rates are a poor indicator of future problems and, given currently weak global growth, entirely appropriate."
[Image: 1444362108623.png]
Comforting stuff.
A month earlier fellow MIT PhD Guy Debelle questioned whether "the government bond rate [is] still the appropriate risk-free yield". I've dedicated many column inches to explaining how efforts by policymakers to suppress government bond yields through tens of trillions of dollars of asset purchases have artificially reduced risk-free rates, which investors use to discount cash flows back to the present. By leaning heavily on the short- and long-term price of money, governments have boosted the value of all assets, including shares, bonds and housing.
Yet Debelle reckons this is no big drama. "The risk-free yield should approximate the growth rate of the economy," he says. "On that basis, the government bond yield is still doing a pretty good job."
The empirical pattern had certainly been one where, before the introduction of quantitative easing (QE), long-term rates tended to reflect the economy's sustainable growth pulse.
[Image: 1444362354026.png]
The problem is that Australia's 2.7 per cent 10-year government bond yield is way below estimates of "trend" growth. Even if we assume that the new normal for trend real GDP growth is, say, just 2.5 per cent (that is, much weaker than the usual threshold of about 3.25 per cent) because of slower population and productivity growth, you still get trend nominal growth of 5 per cent after adding back core inflation.
That's almost double the prevailing 10-year risk-free rate, which implies market pricing is off and far removed from the 6 per cent yield that has held on average since 1993.
Debelle rejects the proposition that central banks' "extraordinary" bond purchases have biased risk-free rates and propagated irrationally inflated asset prices in markets that are not clearing. "Again, I don't see these purchases as distorting the Australian government bond yield, but rather reflecting the reality of the world we live in," he says.
An indirect RBA case for this "low rates for long" meme has also been made by Peter Tulip, who works under Simon in the economics research area. Readers might recall that after alleging Australian housing was "fairly valued" in April 2014, Tulip revealed in July 2015 that it had become "30 per cent undervalued". He reiterated the assertion several times, explaining that "the undervaluation of 30 per cent is unusually wide – the widest in at least 30 years".
After double-digit house price growth between 2013 and 2014, how could Australian bricks and mortar have suddenly become less expensive? "What has changed since [April last year] is that real long-term interest rates have fallen substantially," Tulip clarified. "That fall made housing more attractive relative to renting, despite the increase in prices."
The 10-year bond yield had slumped by about a third (or more than five RBA rate cuts). That had a huge impact on Tulip's valuation estimates because he used this yield to benchmark projected borrowing costs.
'PRICE OF MONEY FAKED'
Matthew McLennan, an Australian who runs $80 billion at First Eagle in New York, says that "the price of money has been faked through central banks cutting interest rates to artificially low levels". McLennan characterises the "yield curve in the US is a seriously distorted entity" as a result of QE and asks: "How can you expect to have a proper allocation of scarce capital to its most productive purpose when the price of the money has been faked?"
Yet the RBA's Simon contends that the central bank's easy monetary policy settings are "entirely appropriate". In contrast to McLennan, he does not think that record-low rates will skew savings and investment decisions in a way that causes imbalances. "Low interest rates are implicated in the formation of property and financial bubbles," Simon acknowledges. "People think that low rates are associated with greater asset price, and hence financial, volatility. But looking at the breadth of history suggests there is no particular link between interest rates and financial or asset price instability."
He maintains that "there are many periods when interest rates have been low and excessive risk taking has not occurred. Indeed, low interest rates have been a more common feature of the financial system over time than high interest rates – which are very much an aberration related to the 1970s and their aftermath."
Simon neglects to mention four fundamental, and interrelated, differences between the world today and that which prevailed before the 1970s: the removal of the "gold standard" and the introduction of non-asset-backed "fiat money" underwritten only by the credibility of governments; the surge in public- and private-sector debt since that time; the arrival of sustained consumer price inflation (now actively fostered by policymakers), mostly absent before the 1970s; and the establishment of central banks for the purpose of guaranteeing the liquidity of highly leveraged (read fragile) private banks and the development of "risk-free" funding via deposits, which has radically multiplied the quantity of money and credit throughout the economy.
It is spurious to suggest that the paucity of links between low rates and financial crises before the 1970s, when there was scant private debt, means that the orders-of-magnitude-higher debt levels today coupled with even cheaper money is A-OK. You cannot divorce prices from quantities: interest rates are simply the cost of borrowing credit.
One of the main reasons there was much lower credit creation by banks before the 1970s was because currencies were tied to commodities (commonly via the gold standard) and "fiat" money, or currency that derives its value from political assurances, was not the norm. In 1973 an ounce of gold was worth US$42. Today the same gold costs US$1145.
Every single documented high-inflation episode has correlated with governments discarding asset-backed money and using their monopoly over the printing press to manufacture vast volumes of costless fiat currency to finance burgeoning budget deficits. This, incidentally, is what is happening today. Beyond central banks printing fiat money to buy public bonds, we have had the more subtle development since the global financial crisis whereby banks are required to hold much larger quantities of "liquid assets" in the form of government bonds. In Australia alone banks have to buy $195 billion of government bonds, which further inflates prices and suppresses yields.
Celebrated academics Carmen Reinhart and Kenneth Rogoff showed in 2013 that sustained consumer price inflation only emerged in the second half of the 20th century following the embrace of fiat money: "[historically] high inflation was . . . a relatively rare phenomenon associated with wars and their immediate aftermath". In 1913 consumer prices "were only about 20 per cent higher than in 1775 and around 40 per cent lower than in 1813".
They argue that inflation has been "dominated by the abandonment of the gold standard in 1933 and the adoption of fiat money subsequently. One hundred years after its creation, consumer prices are about 30 times higher than what they were in 1913."
Fiat money combined with central-bank-backed banks that can source more (government-guaranteed) funding more cheaply than other businesses has fuelled explosive credit creation. This is illustrated by comparing money defined as "M1", which is physical currency, with money known as "M3", which is currency plus deposits (noting also that deposits lead to loans). In 1959, M3 was 8.7 times the size of M1. After exponential growth since the 1970s, M3 is now 28 times M1. Alongside declining interest rates during the 1990s, bank-driven credit creation has pushed household debt from 63 per cent of disposable incomes in 1988 to 186 per cent today.
Simon thinks 3.9 per cent home loan rates are no big deal because "credit growth is generally low". In August the RBA reported that credit had expanded at a "modest" 6 per cent annual pace. Yet judging credit growth in isolation to the quantity of credit and incomes is meaningless. Credit growth is running four times faster than wage growth and twice the rate of national incomes. Given that the debt-to-income ratio is at an all-time high, that sounds worrying to me.
This muddling may be a function of the RBA's mixed mandate. It has the tricky task of being responsible for price stability, full employment and financial stability, when these goals frequently conflict. It has justified slashing rates to support employment, yet ended up blowing a mega-housing-bubble. Institutionally resistant to self-criticism, it now claims houses are cheap, rising debt-to-income ratios are sustainable, and interest rates are "appropriate".
Investors need to recognise the RBA could be wrong.
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Transurban: cities running out of space
Eli Greenblat
[Image: eli_greenblat.png]
Senior Business Reporter
Melbourne
[Image: 674682-eaba04f8-70bf-11e5-9eda-7a08ca7db548.jpg]
Source: TheAustralian
[b]Scott Charlton, the chief executive of $19 billion toll road company Transurban, has welcomed Malcolm Turnbull’s determination to be an “infrastructure prime minister’’ and has already had meetings with the Major Projects Minister to discuss initiatives to unplug a bottleneck of critical projects.[/b]
His comments came as Transurban chairman Lindsay Maxsted, who is also chairman of Westpac and a director of BHP Billiton, warned at yesterday’s annual meeting that commuters were fast “running out of space” in the major cities as congestion chipped away at the economy, productivity and quality of life.
With congestion shaving an estimated $15bn a year from the economy and traffic pressures growing, the nation’s model for funding public road infrastructure — largely based on federal fuel excises and state-based vehicle registration and licence fees — was not sustainable.
“This model no longer generates sufficient revenue to meet Australia’s current expenditure requirements, as revenue from fuel excise is in decline as we move to more fuel-efficient cars,’’ Mr Maxsted told investors.
Infrastructure Partnerships Australia and Citibank have estimated the funding deficit for key projects at $700bn, almost half of Australia’s GDP, with experts signalling that the nation was now suffering from long-term underinvestment in infrastructure.
“Reform to the funding model is critical and some difficult decisions will need to be made if we are to protect the livability and productivity of our cities,’’ Mr Maxsted said.
After the shareholders’ meeting Mr Maxsted told The Australian the nation could not afford continued delays to urgent infrastructure projects and transport reform, with cities “running out of space”.
“All options need to be on the table,” he said.
“More toll roads, there is a role for that, but that is not the only solution and we will run out of space over time given the density of populations in Melbourne, Sydney and increasingly in Brisbane and all the capital cities.
“We have to have better solutions and better ways of funding roads. I think we have time, but we are starting the debate now, we need to discuss it because if we don’t discuss it now then if it starts being discussed in five years it will be another five years before something happens — and then it might be too late.”
Mr Charlton was buoyed by comments from Mr Turnbull that he would focus on infrastructure during his leadership.
“I will be an infrastructure prime minister, an infrastructure prime minister that supports all infrastructure on the basis of its merits,” Mr Turnbull said at the weekend as he announced a federal grant of $95 million to link the existing Gold Coast light rail line to the main rail line in the state’s southeast in time for the 2018 Commonwealth Games.
“I guess we are always happy when the government wants to spend more on infrastructure,” Mr Charlton told The Australian.
“And we have a network-type approach. It isn’t all about roads, it’s about rail and other types of infrastructure.’’
Mr Charlton said he had held an initial meeting with Paul Fletcher, Minister for Major Projects, to discuss Transurban’s work on the Gateway Upgrade North project in Queensland and NorthConnex in NSW, both government-funded, as well as other projects and work on road usage.
He supported comments by his chairman on the vital need for fresh infrastructure projects.
“It comes back to the quality of life. If motorists are spending an hour in traffic each day, so two hours for a total trip, then it is diminishing the quality of life and the productivity of our cities — so that’s where Australians have to make a choice,” Mr Charlton said.
Earlier at the AGM, the toll road operator told shareholders it expected to pay a full-year distribution of 44.5c a share, up from 40c in fiscal 2015.
“This reflects our continued confidence in the long-term cashflow and outlook for the business, and our commitment to increasing distributions to create value for our security holders,” Mr Maxsted said.
Transurban released its latest quarterly revenue performance, showing a boost in quarterly toll revenue bolstered by robust performances by its Sydney and US assets.
In the September quarter, Transurban lifted statutory toll revenue by 17 per cent to $427m. On a proportional basis, the company’s preferred measure, Transurban posted an 18.9 per cent lift to $446m. Proportional revenue from Sydney alone rose 16 per cent to $187m, with the Hills M2 and the M5 South West motorways continuing to benefit from upgrade works.
Proportional toll revenue rose 9.3 per cent to $68m in Brisbane and by 6.7 per cent to $153m in Melbourne. The group’s Virginia toll road network in the US enjoyed a revenue increase of 257 per cent to $US28m ($38.1m).
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Malcolm Turnbull - Malcolm's Turn to Bull...
Business confidence rises after Malcolm Turnbull becomes PM
Michael Roddan
[Image: michael_roddan.png]
Reporter
[Image: 257635-3a14f3a8-7144-11e5-87c5-82c509632f8f.jpg]
Business confidence rose after Malcolm Turnbull became prime minister, but business conditions and fewer financial jitters may have helped. Source: AAP
[b]Business confidence levels rallied in September amid the ascension of Malcolm Turnbull to the prime ministership, despite lingering concerns about financial market volatility.[/b]
National Australia Bank’s monthly business survey showed confidence rose 4 points to a reading of 5 in September, while the business conditions result, which measures employment, trading and profitability, held steady at a reading of 9 points during the month.
“Overall, the business survey suggests a good degree of resilience in what appears to be a building non-mining sector recovery,” NAB chief economist Alan Oster said.
Confidence levels rose as the government’s leadership uncertainties were resolved, with Tony Abbott being replaced by former investment banker Malcolm Turnbull in mid September.
“It is not clear to what extent this reflects the change in leadership of the Liberal Party, as solid business conditions and some dissipation of financial market jitters may have also contributed to the result,” Mr Oster said.
Financial market volatility and emerging market concerns moderated during September from the heights of the previous month.
Business conditions held on to “solid gains” obtained over the past year.
“The improved momentum in the non-mining economy is not merely an aberration, but has become much more ingrained,” Mr Oster said.
Surveyed employment conditions turned positive during September and increased to the highest reading since mid 2011.
“There remains, however, a notable divergence in business conditions across industries. Services industries continue to outperform, while the mining industry trails well behind,” Mr Oster said.
“Weak commodity prices and falling mining investment will remain a drag on economic activity and downside risks from offshore remain pronounced.”
Despite this, it was difficult to mount a case for further Reserve Bank interest rate cuts, and the current market pricing for further easing was “overly pessimistic”, he said.
Business Spectator
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Economic downturn possible but recession chances low: RBA
- JAMES GLYNN
- DOW JONES
- OCTOBER 13, 2015 11:20AM
[b]The probability of recession in Australia is low, but a period of contraction in the economy can’t be ruled out, the Reserve Bank of Australia says.[/b]
Philip Lowe, deputy governor at the Reserve Bank of Australia, said despite the country’s record of 24 years without recession, predictions of unending expansion would be misplaced.
“The probability of recession is low, but there is a probability that at some point we will have a downturn,” Mr Lowe told a conference.
“The idea that the Australian economy can just keep growing without having short periods of contraction is a mistake. What we should be hoping for is that, when those periods inevitably happen, that they are short-lived,” he added.
Mr Lowe said the RBA still retained an upbeat view of the economy.
“We think the economy’s on a gradually improving track; that the unemployment has stabilised; that growth has been 2.0 per cent to 2.5 per cent for a while, but will gradually pick up,” he said.
Start of sidebar. Skip to end of sidebar.
End of sidebar. Return to start of sidebar.
Bank forecasts this week that said Australian house prices will start to fall soon weren’t concerning, Mr Lowe said. Some period of moderation in house prices would be a good thing, he said.
House-price growth can’t be expected to continue indefinitely as household debt is still growing well above the rate of wage growth.
“Housing risks are higher,” Mr. Lowe said.
He told Australians not to overcommit with their home loans, warning interest rates will eventually rise.
“People do need to be careful ... debt levels can’t keep rising faster than income.”
The comments in a question-and-answer session followed an earlier speech where Mr. Lowe called for a continuing focus on ensuring the economy remains flexible.
He said economic flexibility existed in the exchange rate, interest rates and budget policy, which is helping to create solid economic fundamentals.
“These fundamentals are strong and provide us with the basis to be optimistic about the future,” Mr Lowe said.
“At the same time, none of us has a crystal ball, so we can’t be sure exactly what that future holds. What we can be sure of is that we will be best placed to take advantage of our strong fundamentals if our economy is flexible.”
The comments come as the furnace of a mining-investment boom that fired strong growth for much of the last decade has cooled. Falling commodity prices and a slowdown in China, Australia’s biggest trading partner, saw economic growth slow to its weakest pace in four years in the second quarter.
Many economists expect interest rates, currently at a record low, to be cut further. Some say the risk of a recession is rising.
A debate over the need for economic reform to lift productivity and economic growth to help fend off the threat of falling living standards is under way in Australia. Prime Minister Malcolm Turnbull convened a national summit on the topic last week.
Dow Jones
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(01-10-2015, 03:07 PM)greengiraffe Wrote: Job vacancies at highest level in almost three years
Michael Roddan
[Image: michael_roddan.png]
Reporter
[Image: 243070-4c165196-67e4-11e5-80b2-c23ead0b75ad.jpg]
There were 160,900 vacancies in August, up 2.7 per cent from May. Source: Supplied
[b]The number of job vacancies is picking up pace, rising 2.2 per cent in the August quarter to the highest number in nearly three years, according to the Australian Bureau of Statistics.[/b]
The total number of vacancies in the three months through August was 160,200 in seasonally-adjusted terms, increasing from the upwardly revised May quarter reading of 156,800.
There are now 8.5 per cent more job vacancies, on a seasonally adjusted basis, than a year ago, and vacancies are at their highest point since November 2012.
“The job market continues to improve with job vacancies at the highest levels in almost three-year highs,” CommSec economist Savanth Sebastian said.
“With population growth slower than in past years, unemployment has more chance of falling over the coming year,” Mr Sebastian said.
The unemployment rate has been stymied above 6 per cent since June 2014.
There were 147,100 private sector job vacancies in the August quarter, up 2.4 per cent on the previous quarter in seasonally adjusted terms.
Meanwhile, the number of public sector vacancies increased a seasonally adjusted 0.6 per cent to 12,500.
However, the transition away from the mining boom continues to be evident across the country, as the much-maligned two-speed economy now sees the mining-exposed states fall behind.
Over the year vacancies lifted 18.6 per cent in Victoria in original terms over the year but fell by 34.2 per cent in the Northern Territory and by 11.3 per cent Western Australia.
Job vacancies have declined the most in the manufacturing industry, the mining sector, transport and storage, and communication services sectors over the past year. Administrative support and accommodation, cafes and restaurants, on the other hand, have posted more vacancies.
Jobs market resilient as mining boom dies
[Image: 822763-624b6754-732d-11e5-8a80-5a407624b6b3.jpg]
Jobs. Source: TheAustralian
[b]The jobless rate is holding steady at 6.2 per cent of the workforce despite slow economic growth and the winding down of the resources boom.[/b]
The official labour force survey for September showed a small fall in the number of people in work, however the annual rate of growth of 2 per cent is still the best since early 2011 when the economy was still bouncing back from the global financial crisis.
The economy generated 230,000 new jobs over the past year with more than half the positions in NSW.
The strength of the NSW economy is offsetting the weakness in Western Australia where jobs are being lost as the construction of resource projects is completed.
The dip of 5100 in the workforce in September was the first such fall since April and reflects the usual volatility in the monthly survey’s results. ANZ senior economist Justin Fabo said other indicators of the labour market, such as the level of job advertisements and business surveys, show labour market conditions are more positive than suggested by the small fall in jobs last month.
Economists said the Reserve Bank, which has highlighted the surprising resilience of employment, was unlikely to be swayed by a slight fall in the number of jobs last month, although many expect that softening in the economy will force rate cuts over the next year.
UBS chief economist Scott Haslem said the number of hours being worked is at the highest level in four years, which he said was consistent with the strength of business hiring intentions and the relatively high levels of job security, which have been highlighted in recent surveys.
“These better trends reflect rebalancing toward more labour intensive non-mining sectors, especially services, while growth has also rebalanced to NSW and Victoria, from resource-rich Western Australia and Queensland. There’s little here to suggest the economy needs a lower cash rate.”
The unemployment rate has now been hovering around 6.2 per cent since the middle of last year. In May, the Reserve Bank and Treasury predicted the jobless rate would rise to 6.5 per cent, however jobs growth has accelerated since then.
Westpac senior economist Justin Smirk said the rate at which people were being hired appeared to be falling, but there had been a sharp drop in the number of people being made redundant.
The state figures show the unemployment rate is lowest in NSW at 5.9 per cent, and highest in South Australia at 7.7 per cent. The rate is between 6 per cent and 6.3 per cent in all the other states.
Tasmania’s jobless rate of 6 per cent is the lowest in four years and a big fall from a peak of just under 9 per cent two years ago. In Western Australia the jobless rate has climbed from 3.5 per cent three years ago to 6.1 per cent now.
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Goldman Sachs says El Nino could force RBA to cut interest rates
DateOctober 16, 2015 - 7:47PM
[Image: 1426323565853.png]
Vanessa Desloires
Reporter
A severe drought from an intense El Nino weather pattern may drag Australia's growth below 2 per cent and force the Reserve Bank of Australia to cut interest rates, Goldman Sachs says.
Australian policy makers are anticipating flat farm production in 2015-16, but have not factored in a drought. The Bureau of Meteorology has forecast a "significant shift" towards a drier and hotter December quarter as the El Nino pattern reaches its peak.
Australia experienced its third driest September on record, and the bureau said the El Nino, which is usually associated with below-average spring rainfall in eastern Australia, is the strongest since 1997.
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Australian Annual Real GDP Growth in times of drought. When a drought occurs in a period of weak growth policy tends to be eased. Photo: Goldman Sachs
Goldman Sachs, led by head of macro research in Australia Tim Toohey, said in a drought year, farm production declined by a median 20 per cent.
"Somewhat fortuitously, in Australia the 1994-95, 2002-03 and 2006-07 droughts all happened to coincide with very robust economic growth," it said in a note this week.
In those periods, Australian gross domestic product tracked at more than 4 per cent.
But the prospect of falling farm incomes against a backdrop of the challenges of lower commodity prices and record low wage growth was threatening the modest recovery in Australia's non-mining economy, which had partially offset the end of the resources boom.
The onset of El Nino has Australia's grain farmers bracing for the worst, with Rabobank sayingwheat production was 27 per cent lower in El Nino years.
"The emergence of early warning indicators of a severe drought event in Australia and New Zealand comes at an uncomfortable time for policy makers in both countries," the Goldman Sachs note said.
Mr Toohey said the investment bank was concerned its GDP growth forecast for 2016 of 2 per cent understated the risk of an intensifying drought in agricultural parts of Australia.
That should provide "sufficient reason" for the RBA to cut interest rates, they said.
"We continue to expect the RBA to ease interest rates by 25bps in November and then to reduce interest rates by 25bps in December."
"If there is to be additional monetary easing in both countries in 2016, the depth and severity of any drought will not be an insignificant factor."
The note comes as London-based macroeconomic forecasting agency Lombard Street Research said record low interest rates were proving less effective in boosting Australia's economy than the depreciation of the Australian dollar, while risks to economic growth tilted to the downside.
"The non-mining sector has turned around, with manufacturing and service exports growing at their fastest pace since the crisis – a development that has attracted relatively little attention," Lombard Street Research economist Konstantinos Venetis said.
But the fall in the Australian dollar, currently trading around US73¢ with analysts anticipating a fall below US70¢ by year's end, was having a stronger and quicker effect on real activity than lower interest rates.
"Investment has been relatively unresponsive to successive policy rate reductions, and it should continue to be so for a while longer," Mr Venetis said.
The road would become more difficult for the RBA, with the mining boom expected to totally unwind by the end of 2016 and external drivers including China's slowdown skewing risks for GDP growth to the downside.
"Supported by a weaker currency, Australia's non-mining sector has been taking up some of the slack left by the receding resource boom," Mr Venetis said.
"But there is a good chance that the low-hanging fruit has been picked, skewing the near-term risks for GDP growth to the downside and complicating policymakers' reaction function."
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http://www.abc.net.au/news/2015-10-16/so...ts/6859682
After years of drowning their sorrows, Australian winemakers celebrate an export milestone
ABC Rural
By Clint Jasper
Posted Fri at 12:14pm
[Image: 6860606-3x2-700x467.jpg]PHOTO: Australian winemakers say the recently signed free trade deal with Korea hascreated a buzz around Australian wine. (Clint Jasper)
MAP: Adelaide 5000
It has been the strongest 12 months for Australian wine exports since just before the Global Financial Crisis, according to new statistics from the Australian Grape and Wine Authority.
For the first time, Asia has overtaken North America as Australia's number one export destination for wine.
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AUDIO: Clint Jasper reports on the growth in wine exports to Asia and the marking of an export milestone for Australian winemakers. (ABC Rural)
Overall, wine exports grew by 5 per cent, to 734 million litres, and the value of those exports increased by 8 per cent to $1.96 billion.
In the bottled wine sector, growth was recorded at all price points, but more expensive wines were the best performing category, with wines selling between $10 and $20 worth $426 million, nearly 30 per cent growth since the same time last year.
EMBED: In the last 12 months the value of Australian wine exports has posted the best growth since a 2007 peak
Asian interest
Despite an austerity crackdown in China, an increasingly popular wine-drinking culture among consumers saw exports in Asia soar.
In addition, a more favourable exchange rate and a buzz created by new free trade deals with Japan and South Korea helped make the past 12 months a record for wine exports, which grew by 31 per cent, to $644 million.
Australian Grape and Wine Authority (AGWA) chief executive officer Andreas Clarke believes the record sales are a combination of the Asian market's increased interest in wine, trade deals and promotional activity from the industry and individual winemakers.
"Many people have put in a significant amount of work in order to get to market, tell story of Australian wine, and that's paying dividends," Mr Clarkes said.
Quote:In China, wine consumption is growing, people have a great thirst to learn more about wine, and every activity AGWA does in China is heavily subscribed.
Andreas Clarke, AGWA
"In China, wine consumption is growing, people have a great thirst to learn more about wine, and every activity AGWA does in China is heavily subscribed."
Murrumbateman, ACT winemaker Graeme Shaw has recently shipped the first consignment of wine from Shaw Vineyard Estate wines to South Korea.
He was spurred on by the spike in interest about Australian product which followed the signing of the Koran-Australian Free Trade Agreement.
"Apart from the reduction straight away in tariffs, the deal itself has created awareness and a lot of publicity about Australian wine and it has sort of woken them up a little bit, so it's been fantastic," Mr Shaw said.
The deal with Korea, as well as a similar free trade agreement with Japan ratified late last year, has also drawn interest from Victorian winemaker Matt Fowles.
"The free trade agreements are interesting and they have certainly bolstered our resolve to enter those markets," Mr Fowles said.
EMBED: A growing wine culture and better awareness of Australian wine have boosted exports to those markets
American decline
North America has moved to second place for Australian wine exports, shrinking by 4 per cent over the past 12 months, earning $428 million.
Mr Fowles says while Australian wines have struggled in the USA over the past couple of years, there has been a shift from commercial brands toward the premium end of the market.
"There is no doubt that in recent times we've had a little trouble over there, but the sentiment is turning and happily it is turning in the areas that are more valuable to the Australian wine industry, and that's in the fine wine end of the market.
[Image: 6860654-3x2-340x227.jpg]PHOTO: America is no longer the number one destinationfor Australian wine.
"That is where we are seeing some movement as a producer who really only sells wine above $15 a bottle on the shelf."
The struggle for Australian wines comes from the crowded marketplace where domestic wines, as well as product from New Zealand, Europe and South America, are all competing for shelf space.
Matt Fowles believes the repositioning of Australian wines from commercial brands to the premium sector will be key in clawing market share away from competitors.
"Changing perceptions is a key task for Australian wine producers, and that is already happening.
"You can do that at the retail level, and by targeting consumers.
"We have to get retailers re-engaged with Australian wine and giving the shelf-space, so then consumers have more access."
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Bundaberg Brewed Drinks exchange risk pays off
Andrew White
[Image: andrew_white.png]
Associate Editor
Sydney
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Bundaberg Brewed Drinks executive chairman Cliff Fleming and son-in-law and CEO John McLeanSource: News Limited
[b]Bundaberg Brewed Drinks learned early in its 27 years of exporting how the vagaries of the exchange rate can hurt the business.[/b]
“We used to sell in Australian dollars only,’’ says John McLean, chief executive of the family-owned maker of ginger beer and sarsaparilla. “But over time the business partners would come to us when the currency went one way but not when the currency went the other way.’’
Guided by the belief that getting their soft drink stubbies into the hands of the consumer was the main challenge, the company decided to take the exchange rate risk itself and ensure buyers from Germany, Britain and US could get it in their local currency.
“It has always been profitable because of the way we structured the business,’’ Mr McLean said. “It has become a lot better in the past year or 18 months because of the dollar.’’
As the Australian dollar hovers around the US70c mark, Bundaberg Brewed Drinks is among the companies enjoying a surge in food and grocery exports. The value of partially and elaborately transformed exports surged 22 per cent to $30.1 billion in 2014-15, according to a report to be presented to the Australian Food and Grocery Council in Canberra this week, far outpacing imports, which also rose.
Highlighting the role currency plays in the industry, total turnover for the largely domestically focused business rose 0.9 per cent to $118.8bn, slower than inflation at 1.6 per cent over the period.
The buoyant export figures come ahead of any impact from free trade deals signed with Japan and South Korea and agreements pending final approval with China and the 12 nations of the Trans-Pacific Partnership.
Australian Food and Grocery Council chief executive Gary Dawson said the significant gains in markets where Australia already had FTA’s such as with the US, highlighted the opportunities that would come from the latest round of agreements. “It means you have an improving pipeline of market access that gives people the opportunity to invest and build their supply capability as these trade barriers come off,’’ Mr Dawson said.
Meat processing was by far the biggest winner, exports increasing from $10.5bn to $13.7bn as years of drought in the US have cut production and boosted imports to the point where the country now takes 30 per cent of Australia meet exports, overtaking Japan as the biggest market.
Boxed meat accounted for 55.8 per cent of Australia’s food exports, but dairy and wine production also held their place in the top three.
Australia’s food trade surplus almost doubled to $10bn, while the deficit, after including grocery items and fresh produce, narrowed by 75 per cent to $1.5bn.
Mr McLean said Bundaberg Brewed Drinks now sold four million cases of stubbies a year and turned over more than $100 million annually, 30 per cent of that in exports.
The son-in-law to company patriarch, chairman and master brewer Cliff Fleming, Mr McLean said the export focus had changed from a widespread of markets to deeper penetration of a smaller number of markets and it was paying off. Bundaberg is the biggest selling and fastest growing ginger beer in California, a base from where it will launch further expansion in the US, Mr McLean said.
“Australia is a great country, but it is only 22 million people,’’ he said. “In the end the economics of scaling the business to make three million cases rather than one million is not that much.’’
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(06-10-2015, 10:28 PM)greengiraffe Wrote: Interest rates: RBA refuses to blink, keeping cash rate at 2pc despite IMF downgrade
Adam Creighton
[Image: adam_creighton.png]
Economics Correspondent
Sydney
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IMF economic growth projections Source: TheAustralian
[b]The Reserve Bank has defied mounting global economic gloom, keeping interest rates on hold for the fifth month in a row and expressing confidence in APRA’s efforts to keep a lid on investment lending in the frothy Sydney and Melbourne housing markets.[/b]
As the International Monetary Fund downgraded its economic growth forecasts yet again, including those for Australia, Reserve Bank governor Glenn Stevens issued almost a carbon copy of his previous month’s monetary statement, whose tweaks if anything suggested even less desire to reduce the 2 per cent cash rate.
The Australian dollar jumped about 0.5 per cent to about US71.2c yesterday on the decision as investors pared back the likelihood of an interest-rate cut. Meanwhile the S&P/ASX 200 index made further modest gains, closing up 0.33 per cent at 5167.
“The available information suggests that moderate expansion in the economy continues,” Mr Stevens said, dumping last month’s qualifier of ‘most of’ and once again pointing to the strength of the jobs market. In the only other major change from last month, Mr Stevens suggested APRA’s efforts to dampen the growth of investor housing lending were “helping to contain risks that may arise from the housing market”.
“The signal seems quite clear that it is unlikely that the bank will see the need to substantially revise its growth forecasts and therefore need to further ease rates,” said Westpac’s chief economist Bill Evans.
“Arguably the governor’s statement represents the fewest number of changes to the previous month’s statement that we have ever seen,” he added.
Annotated RBA statement
The statement evinced cool indifference to the financial gyrations that rocked global markets in September, which dragged the local benchmark index to its lowest close in more than two years, and renewed uncertainty about the timing of the US “lift off” in the wake of weak US jobs growth.
“Equity market volatility has continued, but the functioning of financial markets generally has not, to date, been impaired,” the governor said. “The Federal Reserve is expected to start increasing its policy rate over the period ahead”.
Meanwhile the IMF issued a new set of global economic forecasts in Lima, Peru, marking down its expectation for global growth mainly as a result of weakness in developing countries, to 3.1 per cent and 3.6 per cent this and next year respectively.
“In an environment of declining commodity prices, reduced capital flows to emerging markets and pressure on their currencies, and increasing financial market volatility, downside risks to the outlook have risen, particularly for emerging market economies,” the IMF said.
While the Washington DC-based institution did not downgrade its forecast growth for China — expected to grow at 6.8 and 6.5 per cent this and next year, respectively — it shaved overall growth for emerging markets, which contribute the lion’s share of global growth by 0.2 percentage points to 4 per cent.
“Major commodity producers, notably Canada but also Australia and Norway, are experiencing slowdown,” the IMF said, shaving its expected forecast for Australia’s growth this year to 2.4 per cent. The IMF expects Australia’s growth will rebound to 2.9 per cent next year, when advanced countries overall will grow by 2.2 per cent. The US and Britain are at the forefront of the pick-up in growth in advanced countries, the IMF said.
Its incoming chief economist, Maurice Obstfeld, said the world economy was “at the intersection of at least three powerful forces”, signalling out China’s transition to a consumption led economy, the beginning of a rate-rising cycle in the United States, and perpetually weak commodity prices.
“The holy grail of robust and synchronised global expansion remains elusive,” he said, urging countries to lift infrastructure spending at and time of low global interest rates and enact “targeted structural reforms” to boost economic growth.
A recent improvement in business confidence and rise in the number of job advertisements appear to have confirmed the Reserve Bank’s relatively optimistic view. Last month the governor expressed frustration with the level of pessimism in economic reporting.
Prices in financial markets still anticipate at least one further official cut in interest rates by the Reserve Bank before the middle of next year.
APRA late last year said it would act to try to keep growth in investment housing lending below 10 per cent.
Property market risks remain: RBA
- JAMES GLYNN
- DOW JONES
- OCTOBER 20, 2015 11:57AM
[b]The Reserve Bank looks in no mood to cut interest rates, saying in the minutes of its October 6 policy meeting, published today, that risks to the economy from an overheated property market remain significant, while a lower Australian dollar is doing the work of rebalancing the economy.[/b]
“The key domestic sources of risk to financial stability, and stability of the Australian economy more broadly revolved around developments in local property markets,” the RBS said.
The Reserve Bank of Australia left interest rates unchanged at a record low 2.0 per cent at the meeting. Rates have remained unchanged since May.
The RBA meeting took place before Westpac’s surprise decision last week to raise its variable rates by 20 basis points.
The Australian dollar pushed higher on today’s release of the minutes. Just before 11.30am (AEDT), the local currency was trading at US72.58c, but in the minutes immediately after it touched as high as US72.76c.
The RBA said there was “some signs” that recent regulatory steps to curb surging bank lending to property investors was having some impact in Sydney. That improvement had occurred alongside welcome steps by banks to tighten lending practices and boost their prudential capital levels, it added.
Still, competition in the mortgage sector remains fierce, and a key policy challenge will be to ensure that lending standards at both foreign and domestic banks did not weaken, it added.
House prices in major capitals like Sydney and Melbourne have climbed sharply over the last year, fanned by speculative investment, low interest rates and strong demand from overseas buyers. The RBA has warned about an imbalance in lending and risks of coming house price falls.
Earlier cuts in interest rates were still flowing through to the economy and bolstering growth, while a lower Australian dollar was helping in rebalancing the economy away from mining-led growth, the RBA said.
“This rebalancing was being increasingly supported by the depreciation of the Australian dollar, which had led to a noticeable increase in net service exports over the past year,” it added.
The Australian dollar has fallen by around 25 per cent against the US dollar in the last year.
The RBA cut rates twice in the first half of this year as the economy was belted by sharp falls in commodity prices and growing talk of a slowdown in China, Australia’s biggest trading partner.
But since then, commodity prices have been steady, or even stronger, giving the RBA scope to remain on the policy sidelines.
A slowdown in economic growth in the second quarter, which prompted talk of growing recession risks in Australia, appeared due to temporary reasons, the RBA said.
“The moderate expansion of the economy had continued, although GDP growth in the June quarter was low, in line with expectations, reflecting what appeared to be temporary weakness in resource exports as well as further falls in mining investment,” it added.
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