Crest Economics

📈Trump prepares for second term: What it means for Australia - Nov 2024 📈

The incoming Trump administration has flagged its core economic agenda: lowering taxes, raising tariffs, withdrawing from key global agreements like the Paris Climate accord. We could be expecting larger deficits and higher inflation under Trump’s presidency. The Trump campaign has promised US tax cuts, from lowering the federal corporate tax rate from 21% to 15%.

Tax cuts, alongside a spew of new stimulus proposals, don’t come cheap. It is estimated the US debt is likely to increase by US$7.75trn, where significant increases in US public debt and investment could keep global interest rates stuck higher for longer. For Australia, this will likely drive up borrowing costs and erode the budget surpluses we have enjoyed in recent years.

Steep tariffs of proposed 10-20% tariffs on all imports to US could disrupt global value chains, and targeted tariffs of 60% or more will hamper China’s economic growth. With Australia’s diversification of exports from commodities, majority of aircraft and space parts and machine tools are sent to the US – which poses a challenge to Australia’s goals of becoming an established player in the advanced G/S market.

The global impacts of these incoming changes to tariffs, increased volatility in the US dollar, and a general increase in uncertainty and risk, will almost certainly be felt in Australia.

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📈What may rate cuts mean for housing? - Nov 2024 📈

With rate cuts around the corner, uncertainty around the housing market continues to brew. Although CoreLogic’s Home Value Index (HVI) recorded only a modest gain of 0.3% in October, it still serves as the 21st month of consecutive growth since the market began its recovery.

Although hitting a new high of $11tn, the residential property market’s momentum has been stalling since the early phases of the current upswing. With the total value having risen by $900bn over the last year, investors are believed to be the most significant contributor, making up 38.6% of new home loans. Nowadays, a pivot towards more affordable markets has been manifesting amidst a combination of lower borrowing capacity, affordability challenges as well as a higher-than-average number of prospective buyers in the market. Nonetheless, with Monetary Policy being forecasted to loosen by early next year, ambiguity around the market’s outlook remains. Historically, there has been a strong correlation between falling interest rates and rising house prices, with house prices haÍving risen by 0.6% on average following a rate cut. However, given household debt levels are already at record highs and wage growth remains sluggish, demand in the property market may not be as strong as forecasted. Nonetheless, this is contradicted by limited supply of housing may see house prices continue to rise.

Therefore, this informs an outlook on the housing market to continue experiencing growth, but a gradual loss of momentum and increasing diversity across cities and regions.

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📈Rising Oil Prices for Australians- Oct 2024 📈

Partisan debates over the Middle East conflict have dominated politics recently. Although, the issue feels distant to Australia, Treasurer Jim Chalmers has warned that rising oil prices may be a direct consequence of the crisis. Currently, oil prices are 7% higher than two weeks ago, and Treasury estimates that a 10% increase sustained over a year could reduce GDP by 0.1% and raise inflation by 0.4%. Accordingly, this highlights the sensitivity of the Australian economy to global supply shocks.

Although nothing is certain about the coming months, the potential implications are obvious. Consumers and households would feel the effects at the petrol pump of higher oil prices. The Reserve Bank is also closely monitoring oil prices as it may influence interest rate decisions. Any sustained rise in fuel costs could delay the government’s hopes for rate cuts before the next election. Domestically, Labor’s focus remains on cost-of-living measures and housing reform, but critical bills are stalled, and the opposition has yet to release detailed policy, particularly on their nuclear power plan, raising concerns about their fiscal strategy.

As the 2025 election nears, both sides must balance economic management with voter sentiment. Past campaigns underscore the importance of economic credibility, particularly in managing price stability and stabilising sectors such as housing and energy.
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📈What does China’s Stimulus mean for Australia?- Sept 2024 📈

Amidst a prolonged, sluggish economic recovery post-Covid, Australian Treasurer Jim Chalmers has hailed China’s prospective stimulus effort as a “really welcome development”, as what it provides “big consequences for our own economy, workers, businesses and investors”.

With the pandemic having caused disruptions and job losses, coupled with falling home prices, Chinese consumer confidence remains low, and the government has failed to provide support to stimulate domestic demand until this point. With official figures for August indicating an increase in urban and youth unemployment (5.3% and 19% respectively), analysts forecast that China will fail to meet its GDP growth target of 5%. Thus, this has prompted recent measures, including a reduction in the amount of reserves that banks are required to keep (stimulating liquidity), reducing interest rates on commercial bank loans (mortgage rates will be cut by about 0.5%) and also lowering down-payment requirements for second home buyers (25% to 15%). Despite this being forecasted to help 50m households and 150m people, there has also been commentary that this will be insufficient to “drive a turnaround in growth unless followed up with greater fiscal support” (Julian Evans-Pritchard, Head of China Economics at Capital Economics). In particular, sentiment towards China’s urban property market besides Beijing and Shanghai is trending lower, ultimately limiting the policy’s effectiveness in the long term.

Ultimately, despite a raft of new policies being developed (i.e. share market stabilisation), the fact remains that China’s anaemic private sector will continue struggling amidst an unclear Chinese business environment. The extent of this is demonstrated in “private firms feeling they don’t have a future, so they are now closing their factories, moving their money out of China and going to Singapore and other countries”. Therefore, with their status as Australia’s largest trading partner, this may foster severe negative implications for the Australian economy too.

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📈US Fed Cuts Rate- Sept 2024 📈

The US Federal Reserve has cut its interest rate by 0.5 percentage points, bringing it to a range of 4.75% to 5%. This reduction, the first in over four years, signals an attempt to loosen the previous tight monetary stance which had been implemented to combat high inflation. This decision aligns with the Fed’s aim to promote employment and price stability.

This monetary easing comes after an extended period of contractionary policy. Beginning in 2022, the Fed aggressively raised rates to curb inflation, which had surged to 9.1%—the highest level in decades. These rate hikes operated through the credit channel, increasing the cost of borrowing for households and firms, thereby reducing consumption and investment. Now, with inflation dampening, the Fed’s rate cut is intended to stimulate economic activity by making credit more affordable, theoretically expanding both consumption and investment.

Many central banks, including those in the UK, the Eurozone, and Canada, have similarly began easing their monetary policies. The interest rate parity theory suggests that such movements can affect exchange rates, with lower US interest rates potentially weakening the US dollar against other currencies. This could influence the competitiveness of US exports and alter capital flows, as global investors seek higher returns elsewhere.
Australia, too, may feel the ripple effects of this decision. With the Reserve Bank of Australia maintaining a higher cash rate of 4.35%, the divergence in rates could place upward pressure on the Australian dollar, given that lower US rates might reduce the attractiveness of US assets. Governor Michele Bullock has indicated that the RBA’s approach, which has been more cautious than the Fed’s, is designed to curb inflation without inducing a recession.

Australia’s economy has begun to stabilise with inflation recovering at 3.9%, and unemployment at 4.2%. However, if the Fed continues to cut rates, the RBA may face pressure to respond, particularly if the exchange rate experiences volatile movements, impacting the cost of imports and exports.

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📈Economic Pressures Mount Higher - Sept 2024 📈

Australia’s economy has recorded its worst performance in over 30 years, notwithstanding the COVID-19 period. The ABS reported that GDP growth in the April-June quarter was just 0.2%, with annual growth reaching only 1 percent – marking the slowest growth since 1991-92, outside of 2020, when the country was recovering from a recession. On a per capita basis, accounting for the recent high levels of immigration, GDP fell 0.4% during the quarter – a trend now in its sixth consecutive decline. Compared to last year, it dropped 1.5%.

Australia’s economic activity has been significantly impacted by rising interest rates and high inflation, leading to reduced consumer spending. The Reserve Bank of Australia (RBA) raised interest rates 13 times between May 2022 and November 2023 in an effort to curb inflation, which has worsened cost-of-living pressures. Household consumption in the June quarter declined by 0.2%, marking the largest drop outside of COVID since the global financial crisis. Economist Callam Pickering noted that the economy is now propped up by government spending and population growth, while many Australians feel the effects of a recession despite positive growth figures.

These factors have placed growing pressure on Prime Minister Anthony Albanese’s Labor government, as inflation remains above the RBA's 2-3% target. With approval ratings dropping, concerns about the country’s economic outlook are becoming increasingly widespread.

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📈Aussie Dollar Expected to Rise in Value - Sept 2024 📈

Forex analysts predict that the Australian dollar could trade for as much as 70 US cents in the next 12 months.

Over the past year, the AUD has risen from just over 64 US cents in mid-April to hovering just below the 68 US cents range in the last few days. Forecasts further reinforce this resurgence as City Index analyst Matt Simpson claims the AUD could push past 68.80 US cents in December, its highest peak since July 2023. Primarily, this stems from stubborn inflationary pressures shrouding the Australian economy (3.5% YOY in July 2024), warranting a sustained, tight monetary policy stance. This is reinforced by current forward guidance from the RBA, whereupon during the last RBA meeting, discussions of a potential rate hike was ultimately overturned by a decision to keep rates unchanged. Additionally, AMP chief economies Shane Oliver reckons that rising commodity prices and balance of trade further bolsters this. On the other hand, the US has seen monthly inflation data coming in softer than expected, accompanied by the unemployment rate rising for 4 straight months to July. With revisions revealing that the US economy had added 818,000 fewer jobs from April 2023 to March this year, an imminent rate cut from the Fed is expected from the market.

However, downside risks include a global recession and Donald Trump being re-elected and igniting a trade war with China. Further, with recent statistics showing Australia’s current account deficit widening and China’s sustained sluggish recovery, these factors threaten the AUD/USD pair recovery.

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Aussie Dollar Expected to Rise in Value - Sept 2024 Forex analysts predict that the Australian dollar could trade for as much as 70 US cents in the next 12 months.Over the past year, the AUD has risen from just over 64 US cents in mid-April to hovering just below the 68 US cents range in the last few days. Forecasts further reinforce this resurgence....

📈Australia’s Unemployment Rate rises to 4.2% - August 2024 📈

Australia’s labour market is showing signs of strength and strain as the unemployment rate rises amid strong job growth. In July, the unemployment rate increased slightly to 4.2%, the highest level since January 2022. This increase came despite the addition of 58,200 jobs, a figure nearly three times higher than economists’ expectations of 20,000 new positions.

Much of this job growth was primarily driven by full-time roles, with 60,500 positions added, while part-time employment saw a minor decline. The participation rate, which measures the proportion of working-age individuals in the labor force, hit a record high of 67.1%. This increase in labor force participation suggests a robust labor market where more individuals are actively seeking employment, contributing to the rise in the unemployment rate.

Despite the overall positive job growth, certain sectors of the economy are facing challenges. The number of unemployed people grew by 24,000 in July, and the competition for available jobs is intensifying. According to job advertising site Seek, some positions are attracting hundreds of applicants, particularly in lower-skilled roles. The number of job advertisements has fallen by more than 15% over the past year, indicating a tougher job market.

Several industries, including mining and media, have experienced significant job cuts. In July alone, major companies like BHP, Fortescue, and Albemarle announced thousands of layoffs. These job losses, coupled with the decline in advertised roles, suggest that the job market may become more competitive in the coming months.

Looking ahead, the RBA anticipates that the unemployment rate will rise to 4.3% by December, which it considers close to full employment. It is believed that as more people enter the workforce, this additional labor supply could help ease inflationary pressures, potentially allowing the RBA to cut rates in early 2025.

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📈What’s happening with Inflation? - August 2024 📈

The inflation crisis continues to display mixed outputs, though results seemingly show that the Australian economy is heading in the right direction.

With the most recent data on CPI, headline inflation was revealed to have increased from 3.6% to 3.8% (March - June quarter). Despite the worrying nature of these numbers, the more important measure of ‘trimmed mean’ inflation fell slightly from an annual rate of 4% to 3.9%. With the RBA’s main focus being this measure, given it still sits considerably higher than the 2-3% target range, expectations are that the next movement by the RBA will be a rate cut in early 2025. However, what is reassuring is that the prospects of a rate hike amidst ongoing cost of living pressures continue to ease. Upon analysing the drivers behind these movements, annual food inflation was showing to have eased from 3.8% (March) to 3.3% (June). Nonetheless, rental prices continue to demonstrate strong growth (annual rate of 7.3%), reflecting low vacancy rates and a tight rental market. Further, insurance prices have also experienced immense growth, rising by 14% over the last 12 months. Moreover, as the Australian election continues to inch closer, Treasurer Jim Chalmers has offered his own comments too, with the main sentiment being how Fiscal Policy aims to fight inflation without ‘crunching the economy’ amidst weak demand. Whether by correlation or causation, Dr Chalmers also attributed the cost of living relief to ‘directly taking pressure off inflation’.

Nevertheless, inflation continues to run above Treasury forecasts, casting a shadow over government forecasts for a 2.7% inflation rate by year end. In fact, the overall price level across the economy will have risen by more than 20% than it was before inflation burst above the RBA’s target range. Yet, Lucy Ellis, a former RBA assistant governor has placed expectations of a November rate cut. This is supported by the need to account for Monetary Policy’s time lag, as Ellis reckons that inflation data has demonstrated sufficient ‘disinflation’ for a rate cut to be introduced.

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📈Impact of Crowdstrike Outage on Australia- July 2024 📈

The recent global tech outage that disrupted Australian banks, supermarkets, airports, and various businesses has drawn significant attention from economists. Triggered by an error in a software upgrade by US cybersecurity company Crowdstrike, the outage left many businesses inoperable for hours, with economists now assessing the financial toll.

The outage’s immediate impact was felt across several sectors. Retailers and supermarkets faced closures or limited operations, as critical services like EFTPOS, online orders, and self-serve checkouts were unavailable. Businesses had to revert to manual processes like paper receipts, significantly slowing down transaction speeds. This highlights the modern economy’s dependency on IT infrastructure, where disruptions can halt economic activity. Despite this short-term disruption, economists are not concerned about the long term impacts as consumer activities were merely delayed, not eliminated.

Financial markets were also impacted by the outage. As it occurred near the close of the Australian Securities Exchange, local market impacts were limited. However, CrowdStrike’s shares dropped by 11.1%, while competitors Palo Alto Networks and SentinelOne saw gains. Broader market reactions in the US were influenced by multiple factors, including a rotation away from tech stocks and political uncertainties.

Therefore, the recent IT outage underscores the critical role of IT systems in maintaining economic stability. This incident highlights the importance of resilient IT infrastructure and the need for strategic planning to prevent similar occurrences. As businesses and governments analyse the fallout, the focus will likely shift towards enhancing cybersecurity measures and ensuring robust backup systems to safeguard against future outages.

📈ASX200 breaks into historic high on forecasts of Fed rate cuts- July 2024 📈

The ASX200 benchmark jumped 0.73% to close at 8,018 points, a historic high threshold as investors swell with confidence ahead of the impending US Federal Reserve rate cuts. Monday’s rally was driven broadly across the sector, with all 11 industry sectors ending in green and was led by information technology and discretionary stocks at a 1.39% and 1.37% respective increase. From the latest US data in June 2024, the CPI unexpectedly contracted by 0.1% in the month, despite economists expecting a 0.1% increase. Lower energy costs and significant slowdown in rent drove the unexpected decline in inflation. Financial markets priced in an 85% chance of a 0.25% rate cut from in the September meeting later in the year.

Interest rate cuts in the US is likely to widen the interest rate differentials, especially with the RBA poised to increase the cash rate in Australia due to the elevated inflationary environment. Investors would look to shift their capital from investments in US towards the higher interest rate environment in Australia. In particular, the weak AUD would support stronger capital flight into Australian investments that are relatively cheap, leading to higher demand for AUD and an appreciation. The Australian market could become part of the ‘great rotation’ if global investors start to seek opportunities outside of US large cap technology stocks, with potential for another rally.

📈Tightening regulations for Australian Supermarkets- June 2024 📈

Mandatory behaviour codes for Australian supermarkets has recently been confirmed by the Australian Government, promising fines of up to $10m.

Based on a review conducted by former Labour Minister Dr Craig Emerson, the voluntary codes of conduct that supermarkets established themselves a decade ago will now become mandatory with tougher restrictions on making unreasonable demands from suppliers. This acts in the spirit of suppliers who may fear retribution from supermarkets if they raise concerns or exercise their rights, creating anti-competitive behaviours. Additionally, now, rather than instantly undertaking an arbitration process, the mandatory code requires supermarkets to appoint mediators, and have independent arbitration be available as a last resort to make decisions. Specifically, this code applies to supermarkets with annual revenue over $5bn (i.e. Coles, Woolworths, Aldi and Metcash). In conjunction to fines up to $10m, breaches can also include three times the benefit gained from the contravening conduct or 10% of annual turnover. For less serious breaches, the ACCC is entitled to issuing up-front infringement notices worth up to $187,800.

Separately, the government has asked the ACCC to study supermarket pricing, with an interim report due by the end of August. Further, the government has also commissioned quarterly price monitoring reports from consumer advocacy group Choice, in this effort to achieve effective supermarket regulation reform.
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