Kochie’s Market Update: Economic trends and financial activity this week

market-update-feb-7

Hey gang, get up to speed on this week’s financial trends with my market updates.

As most of you would realise I have been the Reserve Bank’s biggest cheerleader for many years. In my view both Governor’s… current Philip Lowe and predecessor Glenn Stevens… and their boards have done a sensational job in managing monetary policy.

As Australia went through that period of political instability of changing Prime Ministers frequently, it was always comforting to know the RBA was actively guiding the economy.

In that time they made some big calls, which would attract a lot of criticism, but most often turned out to be right.

BUT… even this cheerleader is getting more than a little nervous.

On Tuesday, the RBA kept official interest rates on hold. No surprises there. But it was the comments explaining the decision which unsettled me. 

First of all it is sticking with its 2.75 per cent economic growth forecast for this year and 3 per cent next year.

The bushfires and coronavirus will only “temporarily weigh on domestic growth” according to the RBA. It then went and listed all the positives for the economy such as low interest rates, infrastructure spending, tax refunds, brighter outlook for resources and expected recovery in home building. 

The RBA is also more positive on the global environment with the slowdown “coming to an end”.

But then as the week went on car sales fell off a cliff in January and retail trade had its biggest monthly decline in 6.5 years in December. 

To offset those negatives, property values continue to rise and the monthly trade surplus jumped to a new record of $5.518 billion in December. 

The reason… because of China.

Exports to China are up 27 per cent on a year ago. China now accounts for 38.19 per cent of Australia’s total exports – a new record high.  Australia’s rolling annual trade surplus with China rose from $68.48 billion to a record $70.33 billion in December.

And that’s my problem. The ripple effect of the coronavirus in China on our exports could be devastating. Take that out of the economy and I’m tending to agree with the economists at ANZ bank who are forecasting a 0.1 per cent contraction in the economy this quarter. The great unknown is how long the coronavirus continues, how long borders will stay closed with China and our exports take a hit.

If you look at previous influenza type pandemics, like SARS, they tend to come under control when the weather heats up and they literally burn themselves out. Remember it’s winter in China at the moment.

Then economies and financial activity bounce back sharply. I hope history repeats itself.

Let me assure you I’ll be keeping a close eye on it over the next few months. 

And to top things off, today (Friday) Phillip Lowe changes gets tack from the beginning of the week and downgrades the economic growth forecast. So positive at the start of the week… then cautious at the end.

I’ll keep you posted.

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