Boom-boom goes the bust
Best not speak too loudly should somebody in the sharemarket hear, but the economy is officially in a fairly sorry state.
Hardly anybody noticed the December quarter national accounts because on first impressions it was growing by 3 per cent, though even that wasn't really anything to write home about, nor the stuff of a booming sharemarket.
Especially when most of that was in the early part of last year and it's been downhill since, apparently flattening out to about 2.6 per cent growth as we speak, which is too low to generate new jobs and perhaps save some others. Unfortunately, it's not enough to make everybody better off, either.
You may think this divergence strange, and I would, too. But the fact is the sharemarket and economy often go in different directions, and for longer than seems to make sense. So here we are again, with the sharemarket up about 20 per cent in six months, oblivious to the state of the underlying economy.
As it happens, the gap on this occasion may not be as great as it seems and the statistics are dated anyway. Christmas feels ages ago and the December quarter has October and November occupying valuable space. Besides, the sharemarket's job is guessing the future and, apparently to make a point, perked up in the middle of the quarter, to the day. Fortunately there are straws in the wind suggesting the economy is on the mend.
The mining investment boom looks like lasting longer than economists expected - curious considering the enormous cost blowouts in the big gas projects - and commodity prices have not only stopped falling but, in some cases, are rising again.
Although not much is happening to suggest profits are about to surge, the fact is companies did all right last year as the economy slowed. Even allowing for all the cost-cutting and downsizing (and I speak with some familiarity here), overall net operating profits in the non-mining sector rose last year.
True, there were a lot of write-downs, but they're a book entry and perhaps a comment on management, not a cash drain.
So the issue is whether the sharemarket was overly gloomy last year rather than it going over the top this year. Or a bit of both, maybe. As if the apparent contradiction between the sharemarket and the economy weren't enough, here's another. Business owners and managers are getting gloomier judging by an NAB survey, while everybody else is becoming more confident according to the Westpac-Melbourne Institute sentiment index.
I'd say the market is looking above the parapet to the two biggest economies - the US and China - and taking its cue from them. Just as our economy was slowing, theirs were picking up. Eventually their recoveries must lift us.
The US has near-zero official interest rates and a central bank promising to print as much money as it takes to boost the economy. That's music to Wall Street's ears.
Mind you, there's a debate over whether it's easy money or Wall Street's record run of profits during the past three years, itself mostly due to the collapse in value of the US dollar, that has spurred Wall Street on, but who cares? And China is emerging from its engineered slowdown, which still had it growing more than twice as fast as us.
Just don't mention Europe. Or debt. Or deficits. But this combination of easy money and improving growth sure is a heady mix.
Twitter @moneypotts
Frequently Asked Questions about this Article…
The article explains this apparent mismatch by noting the sharemarket is forward‑looking and is taking cues from global recoveries, especially the US and China. Easy US monetary policy and signs of improving growth overseas have encouraged investors, even though domestic GDP growth has slowed. In short, markets are pricing future improvement rather than current economic weakness.
December‑quarter figures initially showed about 3% growth but, when viewed across the year, growth has flattened to roughly 2.6%. The article points out that this pace is too low to generate many new jobs and is not enough to make everyone better off—so the economy is slowing, not booming.
Slower growth (around 2.6%) is unlikely to create many new jobs and may put pressure on existing positions. Still, the article notes companies coped reasonably well last year: non‑mining net operating profits rose despite cost‑cutting and downsizing, although there were a number of accounting write‑downs.
The article highlights a mining investment boom that looks like it will last longer than economists expected, despite big cost blowouts in some gas projects. Commodity prices, which had been falling, have stabilised and in some cases are rising again—factors that support mining activity and can help the broader market.
According to the article, many write‑downs are book entries reflecting past decisions or management issues rather than immediate cash drains. While they can signal problems, they do not always indicate a current cash‑flow crisis for companies.
The article notes a divergence: NAB business surveys show owners and managers growing gloomier, while the Westpac‑Melbourne Institute consumer sentiment index shows rising confidence among consumers. This mixed picture suggests the economic recovery is uneven and that investors should interpret different indicators together rather than in isolation.
Low US official interest rates and aggressive monetary easing (described as the Fed printing what it takes) have been very supportive for global equity markets. China emerging from its slowdown and growing faster than Australia boosts commodity demand. The article argues the Australian market is looking to these two big economies for direction.
The article warns that Europe, sovereign debt and deficits are largely being ignored in the current optimism. It also highlights a debate over whether markets are benefiting from genuinely easy money and fundamentals or simply from currency‑driven profit runs. Those are legitimate risks for everyday investors to keep in mind.
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