Growth trend is not your friend

This week on Talking Finance:

• David Plank, Head of Australian Economics at ANZ, explains why economic growth is slowing;
• Eleanor Creagh, Australian markets strategist at Saxo Bank, shares her thoughts on whether more rate cuts are on the way;
• Kieran Gilbert, Sky News Chief Political Reporter, tells me how Scott Morrison is faring following his election victory, and if opposition leader Anthony Albanese stands a chance against him; and
• Alex Pollak, CEO, CIO and Founder of Loftus Peak, runs me through what Apple is up to, and the impact the US-China trade war is having on the technology sector globally.

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EL: Hello and welcome to Talking Finance, I’m Evan Lucas. This week: David Plank, Head of Australian Economics at ANZ, explains why economic growth is slowing – but could it be in for a turnaround? Eleanor Creagh, Australian markets strategist at Saxo Bank, shares her thoughts on whether more rate cuts are on the way. Kieran Gilbert, Sky News Chief Political Reporter, tells me how Scott Morrison is faring following his election victory, and if opposition leader Anthony Albanese stands a chance against him. And Alex Pollak, CEO, CIO and Founder of Loftus Peak, runs me through what Apple is up to, and the impact the US-China trade war is having on technology globally.

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For this week’s chat on economics, I’m joined by David Plank, Head of Australian Economics at ANZ. David, GDP out today, slowest growth in Australia since the GFC, can you see any forms of turnaround coming?

It was weak, largely as expected, but yes, we’ve had three very weak quarters. I think there are some aspects of it which were okay, we did see non-mining business investment be reasonably strong for the quarter. We know that we’re getting close to the point where mining investment probably stops falling, so that was a drag. So if non-mining business investment continues to grow and mining investment stops falling, then that boosts GDP a little bit. Government continues to contribute. I think those things help but what we do know is that the consumer is weak, housing construction is falling, they’ll remain a drag I think on GDP for some quarters to come.

Yes. Just having a look at some of the data, obviously there is still a slight sign of the savings ratio ticking up, bringing in what happened with the RBA as well, do you actually see it as being a stimulant or do you think that most households with the current environment with the way growth is, are more likely to continue to try and bring that savings ratio back up towards trend rather than probably what we’ve seen in the past.

I think that we’ve seen since the election that there has been a rebound of sentiment in the housing market. I think that reflects a number of things. We’ve seen an easing in the credit constraints and I think the changes that APRA made around the interest rate floor the bank’s use matters. We’ve seen obviously the potentially negative implications of some of the policies that the opposition were looking at, such as the end of negative gearing, that uncertainty has been removed. I think at the margin, that matters, and obviously interest rates are now heading down. I think that increases our confidence that the housing market will stabilise in the second half of the year. If that’s right, plus if we couple that to the very large tax cuts that are coming and the impact that will have for a lot of households, then I think it’s reasonable to think that certainly in the second half of the year we’ll get a pickup in household spending and I think that will be important.

In Q2, which is the next GDP report we get in a few months’ time, that won’t get the benefit of those so that will probably still be quite weak. But I think the tax cuts, lower interest rates, stabilisation of the housing market and if we get continued employment gains, and that’s probably the key, then I think there is some reason to believe that the second half of the year we could see a notable pick up in household spending.

The other part of the GDP figures that were quite telling was obviously private investment. We’ve seen the capex numbers out last week and they continue to show signs of relatively unfortunate slowdowns in PI. Is there anything specific that you can see from a government policy side or from an economic side that you can actually really see that moving back into being a GDP add, rather than a GDP contractor.

Yeah, I think it’s important to note that non-mining investment in the last quarter of last year and the first quarter of this year actually has grown quite robustly, so we have seen pretty decent non-mining business investment and if you look at the capex survey from last week, they’ve suggested that the non-mining side of things still intend to invest at a reasonable growth rate. I think that’s a plus. Why business investment overall has looked weak is because it’s been dragged down by mining, but we know that the pullback from mining investment is largely at an end. If anything, actually mining companies are telling us on average they’re going to actually boost investment quite a lot next year and the things that were falling, was really around the completion of the LNG, is now largely over.

I think the investment side could look relatively healthy, the thing that worries me on that front is the deepening clouds over the global outlook. If we start to see or continue to see worsening global outlook, then that may put a dampener on non-mining business investment and tensions for 2019/20. But certainly, at the moment I actually think that that’s a source of some comfort for the outlook.

Probably the next part of that also, and extending that to the next level is going to the fiscal side, you alluded to that before, infrastructure spending – we know it’s being earmarked by the Morrison government. You have an RBA Governor at the moment who seems to be almost begging the fiscal side of the equation to actually get involved. Is there anything specifically that ANZ would really like to see from Canberra, not just to the infrastructure spending, but structural changes that could actually move the economy the way we need to see it?

On the fiscal policy, actually basically over the last year, over the 1.8 per cent of growth, government spending contributed 1.3 per cent, so actually government is making a pretty large contribution. We’re going to get sizeable tax cuts in the second half of the year. We think government spending is going to continue to increase so I would argue government is actually adding quite a bit to growth. It doesn’t mean it can’t do more, and perhaps it should do more, as always, it’s the quality of the decisions that get taken and the risk is that if there’s a rush to do more, we end up doing the wrong things, rather than the things that make sense. On structural policy, I think that’s important, I think we should always look to do that. I’m a bit surprised though that the Governor sees that as helping him out from an inflation point of view. 

Structural changes are in my mind usually deflationary, they’re usually about making the economy grow faster without adding to inflation. I don’t think a big structural agenda would help the Governor over the next year or two, it certainly potentially would boost the economy, but it may do so in a way that actually lowers inflation. Perhaps a little surprising that the he’s putting so much emphasis on that. Certainly, as a short term assistance for him – maybe over the longer term but I think that’s a different question than getting inflation back to target.

Staying on with regards to looking at the Governor, he’s earmarking at least one more rate cut in 2019.  I know you guys at ANZ have been fairly open to the idea that you think there’s at least two, well the one that’s obviously been and one coming. Is there any sort of models that you can see where this could actually fall further than that, or at the moment do you actually see that two done are all done, in this current change?

Well that’s our current view, but following obviously the new data in the last couple of days plus what the Governor said last night, that’s under review. The market is already pricing sub 1 per cent and so there has to be a very good chance that we get below 1 per cent. The question is whether that will be enough and even if we did get below 1, we’ve got tax cuts coming. At least one more rate cut if not a couple more will help, then I think it depends a lot on the global economy and what that means both for business confidence and so on here, and what’s going on globally plays an important role in that. But also what’s happening globally will determine what happens to the Aussie dollar. So far the Aussie dollar hasn’t gone down much, if at all really, in response to the cut. In fact it’s up actually since the RBA cut that’s because the rate cut was largely priced. But I also think that there’s been a big structural change in the way the Aussie dollar performs because we’re now no longer running a current account deficit. The current account deficit is essentially zero, so we don’t need foreign capital anymore which means that the currency’s reaction to falling interest rates is much more subdued than it has been in the past and unfortunately for the RBA, that makes their job harder. Maybe that’s a sign there at some point, rather than cutting interest rates, we need to start thinking about unconventional policy measures. But obviously that opens up a whole raft of challenges.

It does indeed and if I had the time I’d love to ask you about the idea that maybe we could be seeing an Aussie dollar becoming a funding source for carriage rate. But unfortunately, David, I’m going to have to ask you that another time. Thank you so much for joining us.

That’s all right, and the trouble now is we don’t offer any carry, of course.

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EL: Joining me now is Eleanor Creagh, Australian markets strategist at Saxo Bank. Eleanor, big week, obviously. We've seen a heck of a lot of Australian data but the main one is obviously the RBA. We got our 25 basis point rate cut and clearly, we're alluding to the possibility of at least one more. Your take on what you saw over the last 48 hours? Can we go further than that?

EC: Yeah. Well, I think the worst kept secret really after those hints in his speech a couple weeks ago, that we were going to get the rate cut today but I think good news that we've finally seen the RBA wake up to the fact that they are somewhat behind on the economic growth curve and we have seen this marked slowdown. They're really shifting away from this somewhat flexible inflation targeting that we've seen over the past three years, but seen them actually fail to hit even the bottom end of their target range. 

I think now the question is, as you quite rightly say, how many more rate cuts are we going to get? I mean given that we saw that the forecast in the May statement of monetary policy were predicated on two rate cuts, 50 basis points of cut should be an inevitability. I think Governor Lowe pretty much signalled this in his speech last night as well. On that basis, we'd be pencilling in August for another move but potentially there's a risk there that it could come as soon as July. But I think for that we're going to have to wait and see if we continue to see a continued deterioration in the labour market numbers for May. 

If we see an increase pick up in spare capacity in those numbers like we saw in April. We saw underutilisation picking up from 13.3 per cent to 13.7 per cent. If we continue to see that flack creeping into the labour market further and if we see unemployment pick up anymore then I think we will see the RBA move pretty quickly again in July. 

Then the next question...

EL: The point from that though is, and the way I'd argue talking about it is, I think you also have to look at inflation, yes? The inflation for Q2 is out in July. Do you guys see that their core inflation figure of 2-3 per cent is too high? Do you think we could actually start hearing and seeing the idea that maybe they have to review what is actually a reasonable level of inflation in this country?

EC: Well I think certainly their targets are a little bit high for where inflation is trending at the moment. We do have these pervasive weak inflationary pressures. We really need to see some decent wage growth coming through before we can see inflation start to pick up. 

On whether we actually need to change the target. I think there's another argument there, is the fact that inflation expectations actually play a huge role in precipitating future inflation. If we were to see the RBA shift down the inflation target that could actually have a material impact in actually, I guess, cementing further deflationary pressures and pushing inflation down lower, which would have the exact opposite outcome to what the RBA would actually want to achieve in terms of moving that inflation target. In that sense, I don't think it would be a wise move if we saw them move the target range down lower. 

EL: Probably then the next question is, obviously the reaction, however, in markets has been quite different to what you would expect. Aussie Market has moved up ever so slightly, we're up .6 today going on with the .2 from yesterday. It's probably the reaction in the Aussie dollar. Where do you see the Aussie now? I mean if we do take your base case idea, that we're getting another with the possibility of maybe two more. Heading towards that bottom end, which is what JP Morgan have. 

Is the Aussie now overpriced or what's driving that Aussie, in your view, to head towards back to 70 cents rather than the trend it did have, which was back towards 67? 

EC: Well I think with the market pricing in a terminal rate of 0.81 per cent by next year, the Aussie really needed to see that statement yesterday be really dovish and point to continual rate cuts as a roadmap for the trajectory of rates. That's really not what happened. The statement was pretty bland. A yes in the speech, Lowe did signal that there would be further rate cuts but I think he only really signalled that they want to see 50 basis points of cuts at the moment. They then want to lean on the government. In that sense, I think the Australian dollar found some support there. 

We did also see as well, I guess, Powell hinting at rate cuts in the US overnight which took a little bit of a hit out of the US dollar and allowed the Aussie to push up some more, but I think really given that we are going to continue to see rate cuts priced into the market and I think we will continue to see further rate cuts, the tendency is going for the Aussie to remain under pressure in this environment. 

EL: Then the next question that stems from all this is the growth factor. Does this actually see any form of growth?  We saw GDP today; it wasn't exactly rosy on a quarter on quarter basis. It was okay year on year but there is a real drag in the household sector and a massive drag in consumption. Does it actually show any signs of moving the dial or is there needed to be, as you alluded to from what the RBA said, fiscal policy input?  How do you guys evaluate that and where's that heading?

EC: Well I think certainly rate cuts from these low levels are already pushing on the string to some extent. Particularly as we do have a still considerably high household debt levels. We also have an ongoing recalibration in lending standards going on that's probably going to remain an impediment for seeing any pick up in the property market as well.

In that sense, these rate cuts are really only helping at the margin. They're supporting those people with mortgages. They're supporting exporters. They're also having an effect through the weaker Australian dollar as well but I think the RBA are really aware that they cannot do all the heavy lifting here. 

In some sense, a move beyond 50 basis points is also going to be dependent on the fiscal response that we see from the government. This is what the RBA is at pains to highlight. They're really pleading on our newly elected Morrison government and potentially obstruction in Senate, but the downside risks to the economy are certainly not going to evaporate on rate cuts alone, so against a deteriorating global backdrop with the policy rate really pushing towards this zero lower bound. We do need to see a coordinated response here from the government as well.  A focus on productivity reforms, infrastructure spending and other fiscal measures as well, to reignite confidence and a self-sustaining recovery in economic growth. 

I think the key thing here is that policymakers are already behind the curve on policy setting. There's a real risk that, just with these rate cuts alone, there's a further disruption to confidence if we don't see an uptick in economic growth. That becomes self-perpetuating. We continue to see this below trend growth if confidence is not restored amongst consumers and the business community. 

EL: That will be certainly what we are watching over the coming year. Eleanor thank you so much for your time. 

EC: Thank you for having me. 

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EL: Now, here's Kieran Gilbert, Sky News Chief Political Reporter on all the political news of this week and the fallout from the federal election. Kieran, it's been, obviously, a pretty interesting sort of couple of weeks. Apparently, the dust has settled. We've got the final count with regards to how the actual House will sit. Probably the first question to look at is, now with the dust settling, what's the major take from what's happened in sort of the last month around the federal election?

KG: Well, Scott Morrison is all powerful, Evan. He won, and won, basically, on the back of a presidential-style campaign. It was all about him and so, it's not just in terms of his authority over the Parliament, which, of course, he's got a majority, so, he's got that. But also in terms of framing the Liberal Party, now. He's got authority over his party in terms of the direction it takes. We know they've had these ideological battles, personal battles, over the last six or so years. Well, this is a generational shift, and I guess an ideological shift, as well. Because Tony Abbott is out of the Parliament. Julie Bishop is out of the Parliament. Christopher Pyne is gone. This is a new generation of liberal leadership, and he is able to shape the party as he sees fit.

EL: Yeah. On that, and now I think probably an interesting one, he's, obviously, now got a fairly interesting sort of faced, front bench. Anybody that really sticks out to you as probably that sort of generational change that you just alluded to?

KG: Well, first and foremost, Christian Porter is going to be the Leader of the House. He's taking Christopher Pyne's role, so he will have a more front-line position. He's the Attorney General. He is one of their better, if not best, Parliamentary performers. He showed that quite clearly at the end of the last term. I'd be watching him over the next term to be really putting his face, his name, forward because there's a lot of talk about Josh Frydenberg as potentially down the track being a future leader. Over coming years and this term of government, I would suggest that Christian Porter is someone who will be starting to make his name a bit more, increase his profile with the Australian public a bit more in this role of leader of the government in the House.

EL: Probably then switching to the other side of the House in terms of what's going on, as we continue to see, probably, the fallout from the unexpected loss that Labor had. Anthony Albanese now in place. He's obviously released his opposition bench. The bloodletting, obviously, still isn't over. What was your take around, obviously, Bill Shorten's talk to caucus, but also now Anthony Albanese's, let's be honest, walk around Queensland and what he's now taking as the Labor message going forward?

KG: I think he's doing what he needs to do in terms of keeping it very broad at this stage. He's made some good appointments with Jim Chalmers as the Shadow Treasurer now. I think that's a very good appointment, being not only equipped to do it, and one of their better operators, but he's from Queensland and Labor and Anthony Albanese, they need to really make some ground there, because you can't win a federal election when you're primary vote in Queensland is in the mid-twenties. It's diabolical. One in four voters leaving, looking to Labor. They need to do that. They need to really make some ground there, and they can't do that in the last few months of an election year. They need to start doing it now. I think he's right to be heading to Queensland as part of that listening tour.

As for Bill Shorten, well look, I cut him a bit of slack. I think he'd be grieving. It's, obviously, something that he's been working to for decades, and he thought he was going to win. His team thought they were going to win. His speech to the caucus was ill-advised. I probably wouldn't have given him the microphone given how raw all of this is. He's got time to rehabilitate himself in terms of being a frontbencher of a future Labor government. But that sort of thing where you're having a crack at your enemies in a spray really doesn't achieve anything.

EL: Obviously, picking up on that further, because that's, obviously, part of it. I think something that also came out of the election around the Labor scenario is that they really do have a bit of an issue between the urban and regional areas. The loss and leak of votes to the Greens in the inner city, versus the leaking from traditional heartlands in the regions towards your One Nations and your Clive Palmers. What exactly does the Labor Party need to do to actually probably bring it back to their message and bring those voters back to them?

KG: Well, yeah, that's right. Because they leaked their votes to the left. The Coalition, generally, if it's going to leak votes, they'll leak it to the right out of their flank. But elections, they're won in the middle, and Scott Morrison has shown that with this particular election. He said repeatedly, "I will govern from the centre." His message was very much about reassuring Australians, as he said, "Quiet Australians." I think it was all about reassurance, saying he's reasonable.  He's not extreme on either the left or right.

And that's going to be Anthony Albanese's challenge is to take that middle ground once again, while not losing too much support on the left flank. I think it's doable. I absolutely think it's doable. They probably, they had such a vast reform agenda for this particular election, and I just think Australians are more cautious than that. You're going to win an election, fine. But then maybe argue for a mandate once you're in office, as, say, John Howard did in 1996, when then he from government made the case for economic and tax reform, the GST, which he delivered in 1998. The same can be said of Kevin Rudd. Very cautious campaign in '07, really running as John Howard light, reassuring people that he was an economic conservative. He won. I think Labor's approach needs to be targeting the middle, and to recognise that Australians intrinsically are averse to too much risk. Then once they win, if they've got broader reforms they want, they can make that case from office.

EL: Yeah, that, obviously, comes back to probably the final part of your argument, though, is the interesting thing is you said at the start of the whole sort of discussion is that the Morrison government is almost a next generation in terms of where it sits. Does that also, therefore, mean that Labor's not actually fighting a third-term government? They could be fighting a first-term government, and their ability to actually, therefore, get on message. How do they actually sort of get through that problem, as well?

KG: Well, it's a real risk, Evan, because to me this government does feel like a first-term government in many respects. Because, you've got a Prime Minister who has only been in office a short period of time, and an energetic and focused treasurer in Josh Frydenberg. They're the two main figures. It really has got the feel of a new government. They've got a generational shift, as we mentioned earlier, with the departure of a number of figures from the Howard-Abbott governments. Tony Abbott, himself. Julie Bishop, as well. Christopher Pyne. This is a really new look team in many respects. They've got some continuity with Mathias Cormann as Finance Minister. He served in the Expenditure Review Committee from the outset. A bit of continuity, but to me it's got a real fresh look about it. If I was Labor, I'd be very nervous. I can tell you speaking to a number of them in the last week or two since their election defeat, they are anxious about where they go to from here, how they make ground against a very sharp Prime Minister who ran a fantastic campaign.

EL: Which will make the next three years very, very interesting. Kieran Gilbert, thank you so much.

KG: Good on you. Thanks, Evan.

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EL: And now in technology, Alex Pollak, founder of Loftus Peak. Alex, obviously it's been a fairly interesting sort of month and a half, particularly if you're a watcher of the NASDAQ. A lot of people are alluding to what happened in the last sort of 24-48 hours around Apple and their changes. I know you're a big watcher of it. Did you find anything interesting with regards to their current releases around iOS 13 and changes to the iTunes, obviously the scrapping of that?

AP: The iTunes scrapping is kind of long overdue in a way. It's not so much that they're scrapping it. It's like they're launching the separate parts of it, so there’ll be a music bit and there'll be a TV bit and they'll be discrete and one other as well. They're not calling it iTunes anymore or I'm not sure whether they are actually calling it iTunes, but the functionality will still be iTunes. There'll be a screen at the top that says Movies, TV Shows, and Music.

They're just kind of separating the functionality so that when you're looking at the music playlist, it doesn't offer you the possibility of hearing a movie if that's what you choose on your headset, which has always been a bit silly, of course. 

EL: Probably also the next part of that and something that Tim Cook and Co. have been talking around and sort of what we've been seeing in global politics as well as the issue around the US-China trade issue. Apple is obviously very much affected by the increase in tariffs, considering that the majority of their products are manufactured in China. The other part of that is also currently the issue that the US now is clamping down on Huawei. Do you see any form of light at the end of the tunnel with regards to the US/China trade issue and what it means for tech going forward and how Apple fits into that as well?

AP: Evan, the trade war benefits no one in the long term because everything just becomes more expensive, especially if they play the tit-for-tat game, but firing shots at one another in a trade war can be very, very useful. China's had a specific deal for the last 40 years ever since being brought into the WTO in the '70s, and that specific trade deal has resulted in Americans selling Boeing and soybeans and the Chinese selling everything, including toys and all the other things to Americans. 

The collateral in all that was that the Chinese had a bit of a free reign on intellectual property and so a lot of US companies feel like they were badly done by. It's definitely possible that Trump is using this right now to extract a fairer deal out of China going forward with respect to intellectual property and that would be a good thing because there's a whole series of reasons, but American companies can't be fleeced when they go to China and if that's what this is all about, then that's a good thing.

Where it's heading right now with respect to that is the G20 is the next meeting that Xi Jinping and Donald Trump will have and it’s on the Friday the 28th and 29th of June. It’s only a few weeks away and it does appear the positioning between the various trade operatives on both sides is such that that will be the point at which it's all agreed upon and Trump will walk away a hero with a better China deal. The Chinese may just agree to everything and continue on cheating, but I suspect that what Trump is really saying...and this may not be a bad thing, right, that there has to be a more fair deal for American companies so that their IP is not at issue when they go to China, and that could be a very good thing that comes out of this.

EL: The other side of that question, though, is does that mean that Chinese turns around to President Trump and says, "We want access to develop your 5G network" and therefore let Huawei in? And obviously, the political fallout that has been the arrest of their global vice president, does that also come into it?

AP: Well, with respect to the first one, Huawei's not really, apart from some very small systems in some various rural and semi-regional centres, Huawei's not really a player in the 5G side in the US and in all probability will not be.  Huawei is just not a significant player in the US. It has some, in small centres, but not a huge amount. But the deal hurts Huawei because...what has been proposed hurts Huawei because Huawei is a very significant provider of infrastructure to non-US countries. The UK, Europe, and others besides Africa are very big into Huawei kit. The deal won't result in Huawei becoming a big supplier to the US 5G industry, but it will enable Huawei to be a big supplier to everybody else's 5G industry.

Now, it's kind of worth noting that the US doesn't really have a competitor at the 5G end themselves. This is really about, in my view, Trump using Huawei as a mechanism to just extract a better deal and Huawei, as it were, is the baby with a gun to its head. You know, give me the better trade deal or the baby gets it, but the baby didn't do anything, right. Not with respect to America, the baby's not even really in America, but the baby is a baby for all the other countries that are rolling out 5G. I mean, Europe and the UK, Africa, etc.

EL: Just flinching a little bit of tact here as well, it'd be remiss of me not to talk about what also hit the NASDAQ in the last week or so is clearly the issues around anti-trust and the fact that Google particularly has been dragged into what's going on inside the Senate and also inside Congress. Can you see social media and those kind of giant plays facing this kind of revenue pressure over the next coming years? Clearly, it's becoming a big, big issue in the States.

AP: I don't think they'll face revenue pressure. Certainly, I don't think Google will. Facebook may if people switch off, but that hasn't really been the case. They might face fine pressure and that's a different matter altogether. With respect to the end result of the any kind of Google breakup, my observation would be roll on that day because the sum of the parts inside of Google is worth way more than the Alphabet stock price is trading at. But you know, gee, it's early days. All they have done right now is that the FTC and the DOJ have carved up who will launch an action against whom. That's all they've done. 

If you cast your mind back to, say, the way the Time Warner action was launched by, I think it was the DOJ or maybe it was the FTC. The way it was framed, it was doomed to fail and it did fail. So, there's a lot of water under the bridge before anything material can be said about what the outcomes will be. Certainly, it's not good that we're getting closer towards a regulatory outcome because that's uncertainty and that alone is what makes stocks go down, but the outcome of that regulatory outcome could be very positive. So, just a little bit too early to get selling or indeed buying stocks on the back of it.

EL: Alex, with that, thank you so much. It's going to be an interesting period for the year ahead.

AP: Thanks, Evan. It's good to talk. 

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EL: He might be up in the skies now, but that’s no excuse not to celebrate his angelic tunes…here’s a little of Purple Rain to remember him by.

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EL: That’s all from me – have a great week.

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