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The worst is yet to come for Australia as the focus shifts to slowing jobs growth and inflation
Topic Started: 27 Oct 2014, 09:52 PM (1,103 Views)
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Worst is yet to come: Goldman Sachs

October 27, 2014 - 4:02PM

For Goldman Sachs, the worst is ahead for Australia and housing-bubble concerns will fade as the focus shifts to slowing jobs growth and inflation.

The only hurdle keeping the Reserve Bank of Australia from adopting an "easing bias" is a property boom, as mining investment is set to drop further along with raw material export prices and government revenue, said Tim Toohey, Goldman's head of economics, commodities and strategy for Australia.

There's about a 32 per cent chance of a cut to the benchmark interest rate over the next year, a Credit Suisse index based on swaps shows.

"It's going to come down to the unemployment rate, inflation and, as I say, house prices are more of a second-order concern," he said. "Into that March, April period next year, that's when it's going to get interesting."

While markets are pricing in rate-cut risks, none of the 26 analysts surveyed by Bloomberg this month predicted a move lower after RBA Governor Glenn Stevens expressed concern about high house prices and said monetary policy can't directly create the "animal spirits" needed to spur economic activity.

The RBA's job will be made more difficult by the resilience of the Australian dollar as expectations for a Federal Reserve rate increase get pushed back and Europe slows, Toohey said.

A drop-off in mining investment is still to come and will probably have a greater negative economic impact than currently assumed, Toohey said.

In addition, he sees an "income shock" hitting the economy over the next few quarters following the decline in prices of exports like iron ore and coal.

RBA Governor Stevens said in August the economy needs an injection of confidence rather than lower interest rates to stimulate growth.

He signalled last month it was unwise to use monetary policy to spur activity and risk a "boom-bust cycle" given increases in house prices.

Sydney home values jumped 14 per cent in the 12 months through September to a median $655,000, according to researcher RP Data. The average dwelling price across Australia's major cities rose 9.3 per cent.

"There's really only one hurdle standing in front of the RBA in terms of adopting back an easing bias and it is pure and simply house prices," said Toohey.

Read more: http://www.smh.com.au/business/markets/worst-is-yet-to-come-goldman-sachs-20141027-11chrc.html
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Glenn Stevens
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I think we always get this question, where will the growth come from? And most of the time it eventuates.

On business investment, my pretty strong recollection of quite a few cycles I’ve lived through is that you get to a point where the fundamentals of that investment look okay and you’re wondering why aren’t they doing it?

And eventually they will, but quite often that is slower to show up than one would have ideally liked. That’s the nature of things.

I’m not sure if it makes sense if it is a bit slower to come through, it doesn’t make sense to stoke up other things in some effort to overly fine-tune a short-term path of the economy.

We’ve got to recognise that monetary policy has limits to fine-tuning.

We’re not going to be able to absolutely guarantee seamlessly every handover from one source of demand to another.

The economy has actually done pretty well in recent years when you think about it with all these various handovers. Private demand slowed, the government stepped in, the fiscal contraction or consolidation was scheduled to occur, the question was will mining investment pick up? It did. Now, the mining investment is going to slow, will the other pick up?

We don’t know but it’s not as though it’s completely fanciful to expect that there will be a reasonable handover there, and there are very encouraging signs that the RBA has engineered a smooth transition from mining to housing.
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doubleview
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Glenn Stevens
28 Oct 2014, 08:29 AM
We’ve got to recognise that monetary policy has limits to fine-tuning.

We all know that the OZ market is heavily reliant on US rates.

Consideringt the fed told the markets for 2 + years that once unemployment hit 6.5% they would raise rates!

http://www.tradingeconomics.com/united-states/unemployment-rate

I dont understand, what happened?

Furthermore the current Unemployment rate in the US = 5.9% close to the the US average(Unemployment Rate in the United States averaged 5.83 Percent from 1948 until 2014)

All whilst interest rates are currently @ 0.25% (Interest Rates in the United States averaged 6.04 Percent from 1971 until 2014)

Whats doing?
Edited by doubleview, 28 Oct 2014, 09:37 AM.
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Glenn Stevens
28 Oct 2014, 08:29 AM
I think we always get this question, where will the growth come from? And most of the time it eventuates.

On business investment, my pretty strong recollection of quite a few cycles I’ve lived through is that you get to a point where the fundamentals of that investment look okay and you’re wondering why aren’t they doing it?

And eventually they will, but quite often that is slower to show up than one would have ideally liked. That’s the nature of things.

I’m not sure if it makes sense if it is a bit slower to come through, it doesn’t make sense to stoke up other things in some effort to overly fine-tune a short-term path of the economy.

We’ve got to recognise that monetary policy has limits to fine-tuning.

We’re not going to be able to absolutely guarantee seamlessly every handover from one source of demand to another.

The economy has actually done pretty well in recent years when you think about it with all these various handovers. Private demand slowed, the government stepped in, the fiscal contraction or consolidation was scheduled to occur, the question was will mining investment pick up? It did. Now, the mining investment is going to slow, will the other pick up?

We don’t know but it’s not as though it’s completely fanciful to expect that there will be a reasonable handover there, and there are very encouraging signs that the RBA has engineered a smooth transition from mining to housing.
We always get this question Glen, where does growth come from. You have no answer and come out with, it always eventuates. It has up til lately. You then go on to say you have lived through many cycles.

Is this cycle the same as all other cycles Glen ?

Have you ever lived through a cycle where house prices have declined like they have in the US and euro ?

Have you ever lived through a cycle where interest rates have been at zero for over six years in most western economies ?

Have you ever lived through a cycle where interest rates haveever been this low in Australia ?

Have you ever lived through a cycle where foreign investment has been so hi ?

Have you ever lived through a cycle where so many are negatively geared and paying interest only loans ?

Have you ever lived through a cycle where wages started falling ?

Have you ever lived through a cycle where we have the level of building we have going on right now in Australia ?

Ha e you ever lived through a cycle where superfund can leverage in like now ?

Have you ever lived through a cycle where cheap foreign labour ,cheaper by far than anything that came before it, is now so cheap making everything we used too, that our jobs and Industries we have had in this country for generation after generation are closing down ?

I'm getting bored now but will address your last comment about a smooth transition from mining to housing .This shows both the lack of mentality and also shows us you guys have no answer for a real economy.
Housing is not an economy or how ones works. The housing industry and growth is merely the result of a good and growing economy. But you clowns have decided that there is no hope for jobs or growing your pay packets that way, so let in immigrants and superfund leverage to rake your money in via stamp duty, gst and other governments rorts robbing more from people that live here .

What you are doing now is destroying what is left of our economy by diverting in even more money and debt into housing and away from the real economy, which is jobs.

And while the building surge may create short term jobs and cover the level of decline we are experiencing with in all otherareas , it is the same mindless path Ireland took. Where eventually the overbuilding is like what we are seeing now and where there is a high level of jobs in construction rises.
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herbie
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doubleview
28 Oct 2014, 09:28 AM
Whats doing?
They don't like the possible low global demand and growth/deflationary implications of falling oil prices according to this:

http://www.kitco.com/ind/Brecht/2014-10-27-Will-Falling-Crude-Oil-Prices-Delay-Fed-Rate-Hikes-Maybe.html
A Professional Demographer to an amateur demographer: "negative natural increase will never outweigh the positive net migration"
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Bardon
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Glenn Stevens
28 Oct 2014, 08:29 AM
I think we always get this question, where will the growth come from? And most of the time it eventuates.

Yep, that happens every time, something always pops up. The other thing that doesn't change is the average work week, no matter how many productivity gains, technology innovation or labour saving devices are introduced to the market we still end up with the average work week. And for those that think there is going to be new innovative products like reducemyrent.com or affordablehousingishere apps coming on the market they will yet again be bitterly disappointed.
Edited by Bardon, 28 Oct 2014, 10:39 AM.
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herbie
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The states reckon they are in struggle street and the solution would seem to be seen to up the GST.

Which will increase housing prices yet again I'd have to guess?

It's a vicious damn game called Get Housing Prices Higher By All and Every Means.
A Professional Demographer to an amateur demographer: "negative natural increase will never outweigh the positive net migration"
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Glenn Stevens
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herbie
28 Oct 2014, 10:48 AM
It's a vicious damn game called Get Housing Prices Higher By All and Every Means.
I think our elevated house prices are largely to do with the way we, as a community, have chosen to configure the marginal supply. My sense is we’ve taken decisions as a community to concentrate our populations around Melbourne and Sydney. I think there are also preference changes with the younger generation today being more inclined to want to live quite close to where they work and enjoy the various aspects of inner city life in a way that perhaps my generation didn’t have such a strong preference for when we were starting in housing.

I think what we’re seeing in the housing market is the sort of thing that low interest rates normally produce; it’s part of the way it works. If I didn’t see that, then I might have a different view about whether the rate setting we’ve got is the right one because you wouldn’t have this evidence that it’s working, but we do have this evidence and it’s accumulating as the months go by that the very low level of rates that we’ve reached is doing many of the things you would expect it to do. That’s a piece of evidence the policy is working. Whether it’s working by enough or not quite enough, of course, is always the judgment call but it’s certainly evidence that the transmission process is working in something like the normal way.
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