The slowdown in the global and domestic economies over the past year creates challenges for the Reserve Bank and the federal government.
Policymakers will need to be alert and deliver effective and timely stimulus. Slowing global economic activity is not being helped by the trade war between the US and China. Slowing global trade is not ideal for the Australian economy, which is effectively a resource (bulks, metals), energy and food exporter. Increasingly, both education and tourism are becoming significant parts of the economy and should hold up well with a lower Aussie dollar. Past private-sector investment is also helping. The very large CAPEX investment in our resource sector over the past decade was a significant stimulus to the domestic economy at the time and while the resource investment boom is behind us, the export-orientated resource sector will benefit from this investment for decades. Further, the government will benefit from the corporate profits that are increasingly derived from this investment.
The housing construction boom that followed the resources boom is now well behind us. The sharp fall in dwelling investment over the past two years has been driven in part by tighter credit conditions for investors (prudential regulation), tighter mortgage lending conditions post the financial services royal commission and limited increases to household incomes and confidence — to name a few.
Going forward, there are some timely stimulus measures that will be required to cushion the downside risks. On the fiscal side, the upcoming tax cuts (for which the government clearly has a strong mandate) will provide the single largest household income boost for some time. They will effectively deliver higher incomes with immediate effect (assuming the Senate aligns). Further, the independent Fair Work Commission increase of the minimum wage to 3 per cent annually (following the 3.3 per cent and 3.5 per cent increases the following two years) is timely. These cumulative increases are significantly larger than inflation and will transfer into the broader economy.
Also, the boom in government-supported infrastructure spending (both at the federal and state level) will continue to absorb the softening housing-cycle capacity for some time. With the 10-year government bond yield now just below 1.5 per cent, bond yields are at historical lows. Clearly, the low rate environment requires fiscal discipline at all times. The RBA looks set to drive the cash rate even lower, in part to support the labour market and encourage further investment.
It will also support longstanding SMSF investments in equities for dividend and the imputation credits. The subdued inflation conditions allow for even lower rates going forward. In summary, a combination of household income growth (tax cuts, wage rises above inflation rate), the ongoing large-scale infrastructure programs, lower cash rates and a lower dollar all combine to help cushion the global slowdown and help drive investment and confidence going forward. A supportive Senate and accommodative RBA is now required.
CIO | Atlas Capital
Director | Salter Brothers Asset Management (SBAM)
As seen also in Herald Sun, Friday June 7, 2019.