Economic growth figures look very soft + bull markets

Hi everyone,

It’s been a big week when it comes to important economic data. Unfortunately the signals aren’t all good and I have a few concerns. So let’s get into it:

• Economic growth figures look very soft

• Michele Bullock takes on some of the traits of Seinfeld’s ‘Soup Nazi’

• Proof that loyalty doesn’t pay

• Hot property keeps getting hotter in the mid-sized capital cities

• How long do share bull markets last?

• Donald Trump’s big pay day

The economy teeters

Economic growth figures out this week were ugly – up just 1 per cent for the quarter and just 1.1 per cent for the year. Remember, this measures the March quarter; it’s now June and economic data since the end of March until now has been even weaker.

Annual growth dropped from 1.6 per cent in the December quarter to 1.1 per cent just three months later. It is the slowest economic growth since the March quarter 1992 (outside of the COVID pandemic) and was well below the decade average rate of 2.4 per cent.

Leading into COVID we were on a world record-breaking run of consecutive quarters of positive economic growth. Since the lockdowns finished it has been tough going.

This latest figure may still be a positive but it includes the impact of 500,000 new migrants into the country. Take their contribution and compare like with like against this time last year and we’d be in an economic recession.

That’s why it feels like a recession.

Once inflation was stripped out, Australia's GDP per capita fell 0.4 per cent in the March quarter and was down 1.3 per cent on the year. The per capita "recession" reflects booming inbound migration, which boosted annual population growth to 2.5 per cent.

The largest part of the economy is household spending which remained weak, with growth of just 0.4 per cent in the quarter and 1.3 per cent for the year – and that includes the lift in migration.

On these figures, household spending appears to be holding up largely because unemployment is still relatively low. But since the end of March, more current monthly economic data shows retail sales slowing even more and unemployment spiking above 4 per cent.

The RBA has wanted Australian households to tighten their financial belts and the national accounts figures show they are doing just that.

Higher borrowing costs, interest payments, personal income taxes and price pressures saw households save less of their income, with the savings rate dipping back to near 16-year lows at 0.9 per cent in the March quarter. Total savings remained below 2 per cent for the year, for the first time since the March quarter 2008, around the time of the Global Financial Crisis.

Household income received grew at its lowest rate since December 2021. But interest paid on mortgages did ease to 3.9 per cent in the March quarter, the slowest quarterly pace in two years which reflected the cash rate staying on hold and borrowers refinancing for a better deal.

That’s a strong message for everyone. As I constantly say, when times are tough analyse every major financial commitment and bill to ensure you’re on the best deal. Loyalty does not pay… I’ll talk more about this later.

RBA Governor’s latest thoughts

Reserve Bank Governor Michele Bullock had a lot to say to the Senate Economics Committee yesterday. As the nation’s financial therapist her appearance was an important soap box to get into the psyche of all Australians.

Economies and economic data are a reflection of our behaviour and she wants to influence that behaviour. Right now she’s using the old carrot and stick strategy.

You all be good boys and girls, keep those financial belts tight and stay in the bunker so inflation keeps coming down.

If we don’t toe the line then the stick comes out: "But if it turns out, for example, that inflation starts to go up again or it's much stickier than we think we're not getting it down, then we won't hesitate to move and raise interest rates again," Bullock told the Senate.

It doesn’t get much clearer than that. Think the infamous Soup Nazi in the Seinfeld TV series: “no rate cuts for you”!

Because that is what Bullock is saying: no rate cuts for us for quite a while. Forget any cuts before the end of the year. There is now every likelihood of rate INCREASES.

Financial markets have been thrown into a spin and are now expecting another 0.25 per cent rate rise, with a 50-50 probability of it happening in December, which would take the cash rate to 4.6 per cent. Any rate cuts are now not expected until at least around this time next year or even later in 2025.

Some of the gloomier economists are expecting 2-3 rate rises before the end of this year. That would be devastating for so many Australian families.

We’ve endured the shortest, sharpest interest rate cycle of hikes in over 50 years and yesterday’s National Accounts shows just how devastating that cycle has been. Interest paid on housing debt is up by 30.8 per cent over the past year because so many borrowers have come off their low fixed rate loans. Since the pandemic, interest paid on housing debt is up by a massive 172 per cent. 

Not only are family budgets getting squeezed by this 172 per cent rise in home loan repayments, but the housing shortage also continues to push home prices higher. As a result, most housing markets around the country are at their least affordable in history. 

All levels of government have to act in unison to solve the housing crisis because it is one of the major reasons inflation is not coming down as quickly as the RBA would like.

Rents and construction costs are staying stubbornly high and there looks to be no solution in sight. We need 250,000 new properties to be built every year to keep the property market in balance and make sure there is enough new housing supply to meet demand and keep values stable.

The facts are that just 170,000 new homes were built last year, 160,000 are expected over this year and building approvals for future new homes are at 10-year lows. There just aren’t enough new homes coming down the pipeline to meet demand for a number of years to come.

It really is a crisis and it’s feeding inflation.

While inflation has come down from its peaks, it hasn’t come down far enough. The RBA is absolutely determined to get inflation down to that 2-3 per cent band. It dropped to 3.4 per cent in December and everyone cheered expecting it would get to within the band quickly and we’d be rewarded with a cut in interest rates.

But in April inflation ticked back up to. 3.6 per cent… so near and yet so far. It’s that last little bit of slowing inflation which is proving stubborn and what the RBA is determined to overcome. Unfortunately, interest rates are the only weapon they can use.

The problem is the RBA doesn’t want to use the interest rate stick too much and tip the economy into recession. It’s a tricky situation for Bullock.

As yesterday’s National Accounts show, the economy is teetering on the edge. Economic growth at 0.1 per cent for the March quarter is anaemic. The building and construction sector is collapsing under soaring construction costs and building companies are going broke.

"In contrast, if it turns out that the economy is much weaker than expected, and that puts more downward pressure on inflation, then we'll be looking to ease so they're the [Plan B] if you like, but they're central to the strategy."

That was an important comment from yesterday’s Senate Economic Committee testimony from Bullock because while the RBA charter is to keep inflation under control, that charter also includes maintaining full employment. So, the RBA is aiming to bring inflation back to target over the coming two years while keeping unemployment as low as possible.

While everyone is focusing on the fight against inflation, the economy is weak and unemployment is slowing rising. It broke up through 4 per cent last month to 4.1 per cent.

Economic history tells us that when economies weaken, unemployment initially rises slowly but then accelerates quickly. The question is whether we have reached that tipping point and saving jobs becomes more important than getting inflation down that little bit further to within the desired 2-3 per cent band.

I have a feeling future rate cuts could come because of unemployment rather than inflation. Watch this space.

The loyalty tax - proof that loyalty does not pay

Enough is enough. Insurance companies and banks must stop hiking premiums and prices for loyal customers, while offering better discounts for new customers.

Last week, Insurance Australia Group (IAG) was hit with a class action which is alleging they’ve used computer algorithms to inflate premiums for existing loyal customers. They target customers who will most likely automatically renew a policy and inflate premiums.

Similar practices are running rampant throughout the banking and insurance industries. It’s no secret that loyal customers are often the ones stung with higher fees and frankly, it needs to stop.

Australians put their trust in big brands and are often shocked when they use comparison services like Compare the Market (where I am Economic Director) and discover just how much we can help them save by switching to a different insurance provider. In some cases, Australians aren’t even aware that they’ve been paying a higher premium by sticking with the same brand or plan.

By switching to a better deal the savings can often be hundreds of dollars over a year, which can make a significant difference as we continue to battle the cost-of-living crisis.

According to ABS data, insurance costs have skyrocketed a whopping 16.4 per cent in the 12 months before March alone. That’s over four times the inflation rate and the biggest increase since 2001.

While it’s great to see the issue finally getting some attention through the IAG class action, urgent action is needed to make up for slow progress over the past couple of years. At the end of the day, the message is the same as it has always has been: compare your bills and insurance renewals as soon as they come through. It doesn’t matter where you go to compare, but really put your bills under the microscope.

There’s a significant difference reported between what new customers and old customers pay and right now not enough is being done to help those people onto better deals.

While the onus is on Australians to search for a better deal, insurance companies and banks need to do more.

A big issue is a resistance from some brands to allow their products to be compared transparently against others on the market. It’s certainly a worry and I regularly advocate for all insurance companies and banks to allow for easy comparison.

Complacency kills your hip pocket and people need to be more sceptical about their bills and make sure they’re not paying more than they need to. I’d urge anyone who’s been with the same bank, insurer or telco for the past few years to be a bit inquisitive, do some research, and see if you’re actually getting a good deal.

Those who have been following me for a while know my wife Libby is the world’s best when it comes to household finances — she has managed ours ever since we were married.

Her golden rule is that she never renews an insurance policy or pays an energy bill without checking to see if there is a better deal elsewhere. Comparison websites are her go-to.

The next time you receive an insurance renewal notice, grab your laptop, run a comparison and see how your bill stacks up with other offers.

Remember, the worst thing that can happen when you compare is finding out that you’re already on a pretty good offer. The best thing could be saving hundreds, if not thousands of dollars.

We are a society that values loyalty. We look for loyal friends, celebrate big wedding anniversaries, and love our devoted dogs.

But that same mindset could be hurting our hip pockets. When it comes to big brands, loyalty doesn’t pay. Force them into comparison, show them you won’t pay more and maybe we’ll start to see better prices as a result.

Hot property gets hotter… but mid-sized cities are outdoing the major capitals

CoreLogic’s Home Value Index rose 0.8 per cent in May, the 16th consecutive month of growth and the largest monthly gain since October last year.

The mid-sized capitals continued to lead the pace of growth, with Perth home values up 2 per cent in May, Adelaide rising 1.8 per cent and Brisbane up 1.4 per cent. In dollar terms, it’s the equivalent of the median dwelling value rising by more than $12,000 month-to-month in each city.

The remaining capital cities recorded milder conditions, ranging from a 0.6 per cent lift in Sydney values to a monthly decline of -0.5 per cent in Hobart and a -0.3 per cent fall in Darwin.

As I often talk about, it’s all because of the shortage of new properties coming on line. The number of properties available for sale in Perth and Adelaide remain more than 40 per cent below their five-year average for this time of the year, while Brisbane listings are 34 per cent below average.

Conversely, listings across Hobart are tracking 41 per cent above its five-year average, a consequence of lower demand, with home sales 6.4 per cent below the previous five-year average over the rolling quarter.

With Brisbane housing values consistently posting solid capital gains, ACT values remain relatively stable which has seen Brisbane overtake Canberra in having the second-highest median dwelling value across the capitals in May… a position Brisbane hasn’t recorded since 1997.

In January, Brisbane dwelling values overtook the Melbourne median. Coming into the pandemic Melbourne’s median dwelling value held around a 37 per cent premium over Brisbane’s, and ACT’s median was approximately 24 per cent higher. However, Brisbane values have increased at more than five times the pace of Melbourne values since the onset of COVID.

The Sydney market also reached a new milestone in May, posting a nominal recovery, equalling the earlier record high set in January 2022. Sydney dwelling values dropped by 12.4 per cent following the January 2022 peak, finding a floor a year later, but have since posted a 14.1 per cent rise.

When it comes to rents, thankfully the pace of growth across Australian rental markets has eased over the past few months, with CoreLogic’s national rental index rising 0.7 per cent in May, the lowest monthly change since December last year.

How long do the bulls run?

On the sharemarket a run of rising values is called a “bull market” while a run of falling values is called a “bear market”. The origin of these expressions is unclear, but one reason could be that bulls attack by bringing their horns upward, while bears attack by swiping their paws downward.

We are certainly in a bull market currently with market indices at near record levels. This bull market has been going for around 19 months, so it begs the question of how long these cycles generally last before the bears come back.

US investment firm Carson Group looked back at a dozen bull runs on the US market since World War II and found that the average length is more than 60 months, or roughly five years.

It also notes this bull market is up about 48 percent from its 2022 lows, whereas the average return two years off a bear market low is 58 percent. 

Length of S&P 500 bull markets since WWII

1949: 86 months

1957: 50 months

1962: 44 months

1966: 26 months

1970: 32 months

1974: 74 months

1982: 60 months

1987: 31 months

1990: 114 months

2002: 60 months

2009: 131 months

2020: 21 months

2022: 19 months

Average: 61 months (5 years)

_{Source: Ryan Detrick, Carson Group}

US courts become Donald Trump’s greatest marketing tool

Looking from Australia we just shake our head at the US political system. How Trump and Biden can be the two best candidates to lead the free world just beggars belief. It is a circus that makes our politicians look good… and that’s saying something.

The latest circus show was Trump’s recent conviction for paying hush money. An outcome which received widespread media coverage here in Australia.

But according to a recent Bondi Partners newsletter, Trump set another historic record following the former President’s conviction. His campaign announced it had raised almost US$53 million in 24 hours after the verdict was handed down.

It far exceeded the US$4 million raised following the release of his mug shot and the US$26 million the Biden campaign raised in 2020 in the day after Kamala Harris was announced as his vice-presidential pick.

In a sign that the verdict prompted first time donors to reach into their pockets, Google searches for “how to donate to Trump” also hit record levels, more than doubling searches for the term on any previous day.

The circus continues.