Unemployment sneaking up + is China in trouble?

Happy Friday everyone,

Lots of money news to cover today but, in some personal news, I’ve taken on the role of Economic Director at comparison website Compare The Market. I’m pretty excited about this as I’ll be providing commentary, insights and resources to CTM’s customers to help them through these tough economic times… similar to what I do in this newsletter.

Since leaving Sunrise I’ve been approached by a lot of major financial institutions to be an ambassador, but it didn’t quite sit right with me. I’ve always advised people to shop around for the best deal for them, no matter the institution.

That’s why CTM is such a great association for me as it helps Australians do exactly what I believe they should do – go to a comparison site and benchmark your bank, insurance and energy products against the rest of the market to make sure you’re getting the best deal… in other words, to ‘Compare The Market’.

It also helps that Libby, who manages our family budget, has been using CTM for nearly 10 years. She refuses to renew an insurance policy or rollover an energy plan until she compares the market for better deals.

And, as I’ve had a lot of experience with the Cash Cow, I think I can handle meerkats!

Interest rate cycle peaks… but unlikely to come down anytime soon

Well, that’s the impression I’m getting from the Reserve Bank at the moment. They seem to be happy that inflation is slowly coming down and the current level of interest rates is slowing the economy without leading to high unemployment.

It is a pretty good result. Yes, higher interest rates put average Australian families under pressure, but keeping them in jobs provides an important safety net. So it looks like rates will stay at these levels for quite some time and come down quickly, as many have been forecasting.

Bottom line is things won’t get worse, but they won’t get better for a while. What you see is what you get for some time.

The minutes from the August Reserve Bank Board meeting stated:

“The information received on inflation over the prior month had been reassuring.”

Remember, the June quarter CPI figure came in below expectations at 0.8 per cent for an annual rate of 6 per cent.

“Inflation had fallen further and been a little lower than expected in the June quarter.” 

The meeting minutes note the arguments to lift the cash rate again will really come down to three things: sticky services prices; a lack of recovery in productivity growth; and stronger wages growth.

Unemployment starting to sneak up

A couple of weeks ago I observed that it was hard to comprehend why the unemployment rate was staying at record lows when there were so many reports of companies retrenching staff. I made the point that I wondered whether the redundancy payouts were stopping their eligibility to be counted in the figures.

It looks like that may have been the case. The July figures showed an unexpected 14,600 lost jobs when economists had expected 15,000 jobs to be added. It meant the unemployment rate rose from that record low 3.5 per cent to 3.7 per cent.

History tells us when the unemployment rate turns bad it can do so pretty quickly. The Reserve Bank will be watching this closely as one of their big aims is to slow the economy and inflation gradually to protect jobs. If unemployment starts to increase quickly it would be a trigger to cut rates.

The Australian Bureau of Statistics noted in its media release this week that the timing of weak employment numbers have recently coincided with school holidays. The last fall in employment was in April:

 “July includes the school holidays, and we continue to see some changes around when people take their leave and start or leave a job. It’s important to consider this when looking at month‑to‑month changes, compared with the usual seasonal pattern.” 

In July, NSW lost 24,600 jobs, Queensland shed 22,800 jobs and Tasmania saw 2,900 job losses. But 16,500 jobs were added in Victoria and 15,000 in Western Australia.

The unemployment rate is highest in Tasmania at 4.7 per cent and 4.5 per cent in Queensland in July. NSW has the lowest jobless rate at 3.3 per cent.

Aussies continue to tighten their belts

More signs that Australian consumers are locking down in the bunker. While official retail sales have been weak for a couple of months as higher loan repayments takes cash out of pockets, a new Commonwealth Bank report shows consumers continued to tighten their belts in July, with spending growth declining nationally to just 1.3 per cent in the year to July, weakest in Victoria.

The monthly CommBank Household Spending Insights (HSI) Index analyses payments data from approximately 7 million CBA customers, which accounts for roughly 30 per cent of all Australian consumer transactions.

Spending gains in July in Household goods, Transport, Hospitality, Education, Insurance, Health and Communications & Digital were offset by declines in Household Services, Recreation, Utilities, Motor Vehicles and Food & Beverage Goods spending.

The strongest State for household spending growth in July was South Australia (+1.9 per cent), followed by Victoria and NSW (both +1.7 per cent), while Northern Territory (+0.1 per cent) and Queensland were flat. However, over the past 12 months Western Australia (+3.5 per cent), South Australia and Northern Territory (both +3.4 per cent) saw the strongest household spending growth, and NSW (-0.2 per cent) and Victoria (-0.3 per cent) the weakest.

And wage rises are starting to slow

I noticed Treasurer Jim Chalmers claiming the latest wage data showed the Government was delivering on its promise to give everyone a pay rise to help fight inflation. He didn’t mention those pay rises were feeding inflation and consequently were one of the big reasons interest rates have had to be increased… And he obviously didn’t point out those wage rises were pulling people into higher tax brackets, so the Government’s budget was in surplus because of higher income tax revenue.

But the pay rises may be peaking. The Wage Price Index (WPI) grew at a slower-than-expected pace in the June quarter 2023. In fact, the 0.77 per cent quarterly pace was the slowest since March last year and below the 0.9 per cent rate expected by economists.

Including bonuses, annual wage growth dipped from 3.91 per cent in the March quarter to 3.74 per cent in the June quarter.

Be wary when your biggest customer gets into trouble

China takes over 30 per cent of our total exports and is by far Australia’s biggest customer. A customer that big is great for any business… except if that customer gets into trouble and then you have to be wary.

Let me tell you, China is in trouble. Look, China isn’t going to go broke, and its Government will stimulate the economy, but it is pretty rocky at the moment.

While the rest of the world is trying to bring down inflation, China is fighting deflation (prices going backwards), which can be equally devastating for an economy.

China has become the world’s factory, so if deflation spirals out of control that factory won’t need as many goods to feed the furnaces and will demand to pay less for what they want… including our iron ore, coal, beef etc.

This would compound the nation’s existing debt burden in real terms and, given China’s aggregate debt (Government and private) is currently estimated at 282 per cent of its economy (far more than that of the US), this could spell real trouble.

The economy is looking so weak China is also experiencing frighteningly high rates of youth unemployment and a housing market that appears to be entering a significant downturn.

China’s unemployment rate for 16- to 24-year-olds hit a record high of 21.3 per cent – and those numbers are expected to rise when the next wave of university graduates transition to the job market. Party leaders are trying to address the youth unemployment problem by creating more high-quality jobs, but so far these efforts appear unsuccessful. The new party line is to instead demand young people be less selective in picking jobs and “eat bitterness,” according to Chinese President Xi Jinping.

Surveyed unemployment rate in China’s urban areas

This month’s superannuation scorecard

According to estimates from leading superannuation research house SuperRatings, the median balanced superannuation option delivered a return of 1.5 per cent in July.

The impact of inflation continues to drive markets with most Australian and global shares delivering modest returns led by energy and commodities stocks.

The median growth option rose by an estimated 1.8 per cent, while the median capital stable option delivered a small positive result, with an increase of 0.8 per cent.

Accumulation returns to July 2023

Pension returns also increased in July, with the median balanced pension option up an estimated 1.7 per cent. The median growth option is estimated to rise 2 per cent for the month, while the more defensive median capital stable pension option is estimated to deliver a 0.9 per cent return.

Pension returns to July 2023

With funds in the process of preparing annual statements, it is a great time to think about reviewing your superannuation arrangements. There are some simple rules of thumb to check, including the level of fees you are paying, the performance of your investments and how much insurance cover you have.

If you are unsure of what investment settings are suitable for you, reach out to your fund to see what services they might offer to help you make these decisions, or talk to a trusted adviser. Remember to check if there is any cost associated with accessing these services before you agree to them.

Land shortages at core of housing crisis

This weekend is the fifth biggest for property auctions… unusual because it’s still winter and the spring selling season hasn’t even started yet. It indicates that the huge shortage of available properties for sale – which has been pushing up values – is about to ease.

As I constantly say, property is all about demand and supply. If supply is low and demand high, values go up… it’s that simple. But if supply is high and demand is low, the opposite happens.

There has been a fear that the spring selling season will see a flood of new properties come onto the market as owners offload highly geared properties to get out of debt. There are certainly early signs of that.

That’s the short-term scenario in the demand/supply balance.

But over the long term, I was interested to read the HIA-CoreLogic Residential Land Report this week, which showed the volume of residential land transactions has fallen 37 per cent over the 12 months to March 2023. This means the volume of new home commencements will slow over the next year.

So the supply of new homes will drop significantly at a time when high levels of immigration will need more new homes to house them.

The HIA-CoreLogic Residential Land Report provides updated information on sales activity in 51 housing markets across Australia, including the six state capital cities. An acute shortage of available land saw the price increase by 23 per cent over the three years from March 2020 to March 2023… compared to just a 5 per cent increase in the three years before that. That’s the sharpest increase in land prices in over 30 years.

This land shortage is going to affect the property market over the long term as, on average, it takes ten years to move land through the seven stages of land release.

According to the report, “while sales numbers have eased significantly from the peak volumes seen during the HomeBuilder scheme, it will take some time before we see a more notable recovery in supply levels. Until then, we can expect land prices will remain elevated, dwelling approvals will continue to track below average, and house commencements will continue easing.”

A treasure trove of rewards

I know you’re sick of me always saying you need to constantly shop around for the best deals on everything. 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. Her go-to comparison website in this hunt for a better deal has always been Compare the Market.

So I was interested in a recent study from Compare the Market on the extra rewards attached to a lot of the policies and plans out there. Insurers, energy retailers and telcos currently offer a variety of rewards to new and existing customers, including sign-up credits, discounts on dining, activities, holidays, gift cards and more.

One insurer even offers 10 per cent off your grocery bill once per month, which can be a lifeline given 32 per cent of Aussies believe their grocery shop is currently the biggest financial burden, ahead of mortgage repayments (24.1 per cent), rent (15.2 per cent) and energy costs (7.7 per cent).

Below are just some of the discounts Compare the Market have compiled across car insurance, home and contents insurance, health insurance and energy.

Note: Accurate as of 10/07/2023. Table are not reflective of all discounts and perks available on the market. Information correct at time of publication. Offers may vary. Always check with individual retailers for terms, conditions and eligibility.