FYI | May 07 2014
By Peter Switzer, Switzer Super Report
[Peter Switzer previews next week's Australian federal budget:]
The good news wrap up
Let me give you a summary of what’s going on now in the economy. Here goes:
- House prices are up 11.9% on a year ago and apartments are up 8.9%.
- Loans for the construction of new homes soared by 22.3% to a record $2.75 billion in February.
- Queensland is the second strongest state on business investment at 17.5% in the Dec quarter.
- Annual credit growth rose from 4.3% to 4.4% – the strongest growth in five years.
- Underlying inflation is 2.7% less than the RBA tip of 3%.
- March unemployment is 5.8% from 6.1% and 88,000 new jobs were added in three months!
- Consumer confidence rose by 0.3% to 99.7 points in April but in WA, it was up 17% and in NSW 8.9%
- The NAB Quarterly Business Conditions Survey showed conditions are at 0 from -2 and business confidence went from 8 to 6 — down but still high.
- Investment intentions for 12 months out are at 18.2, which says business investment could be up 15-20%.
- The March index of exporters’ sales was up 6.3 points — nearly a 13-year high to 9.5 points in March.
- Trend annual growth in tourist arrivals is the strongest in 13 years. The number of Chinese tourists hit a record high of 748,200 in the year to February.
- Retail sales rose for the tenth straight month, up by 0.2% in February. Annual spending growth eased from a four year high of 6.2% to 4.9%.
- The recent trade surplus is $1.2 billion and, over the past year, exports to China hit a record $98.5 billion and the trade surplus hit a record $49.3 billion. China accounts for a record 36.5% of our exports.
And what about the huge impact that the Budget can have on economic growth? This, in turn, can affect our stock market, or even more accurately, our individual stocks. If you don’t believe me, then just think about the last Budget and McMillan Shakespeare.
The last reading on the economy was a 0.8% rise in the March quarter, which took the annual rate up to 2.8%, which was better than expected. By the way, if we annualize the quarterly number of 0.8% by multiplying it by four, we get a 3.2% growth rate. This is better than the December quarter annualized rate of only 2.4%. This suggests, without proving, that our economy is actually on the improve.
The chart above also shows growth has been trending up since the Abbott victory but will it continue after the Budget?
Growth factors
Two things will help our stock market grow. The first is what happens in the US. The faster it grows, the quicker the Yanks will raise interest rates, and the faster the greenback will rise, which will push our dollar down. This will help local growth and the stock market.
As you know, BHP Billiton's and Rio’s bottom lines improve on a lower dollar and cyclical stocks need a lower dollar boost, so in some part, we are in the hands of Uncle Sam.
But we’re also in the hands of Tony and Joe. So even though I think the debt levy/tax is a crazy and unnecessary idea, if the overall tax burden as a percentage of GDP decreases in the Budget, then they will get a tick from me.
You see the carbon tax abolition gives us tax back, and I bet this will get the O.K. from the new Senate, but the debt levy taxes income away from us and will hurt retail sales and related stocks.
Joe and Tony have to be careful not to hurt confidence because the first step to beating our deficit/debt problems is to get the economy growing faster than 3%. I’d prefer to see that happening before the Government ripped into demand by sacking public servants, pulling back industry assistance and raising taxes.
My test of the Budget will be based on, firstly, is it pro-business confidence? Secondly, is it pro-consumer confidence? And finally and importantly for the deficit and debt reduction goals, is it economic growth-friendly?
If it’s not, then it will be a negative for stocks in the short term – though it’s likely to be positive in the long-term – but it could leave Tony and Joe friendless in the popularity stakes.
That means this Budget will have to create good growth in 2015 and 2016, with a nice rising stock market, or else these guys could end up being a one-hit wonder. Unlikely, but possible, in this odd political world we live in. If you don’t believe me, just think Barry O’Farrell and the NSW Libs!
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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