10 reasons the RBA got the wobbles.

wobbly dove.jpg

1.Slowing world growth.

Across the globe, GDP growth is slowing other than for the US.

The US is growing but at the expense of China, which in turn is hurting Australia.JPG

2. Trade war and contracting investment in China.

The Trump White House is waging a trade war against China which is compounding China’s investment slowdown, even after trillions of stimulus.

3. We are still stapled to China.

Our problem is that Australian export revenues are stapled to China. Good in growth cycles (or when there is a commodity supply interruption somewhere outside Australia), but when investment and consumption falter in China we more than notice it.

our export fortunes still stapled to China.JPG

4. Low Engineering activity exposes the shift to a supply and services economy.

As a result of China’s slowdown, the Australian economy is investing less in export-led engineering/development activities and more towards business and home services.

5. Protectionist policies also influence our housing market.

Tightening up of Australian and Chinese foreign investment policies in 2017 and 18 dealt a savage blow to eastcoast apartment markets.

China killed apartments.JPG

Tighter bank lending policies and penalties on interest only loans have more recently been adding salt to that wound.

0.5% penalty for no amortisation.JPG

6. Consumption is falling.

Low real wage growth and lack of confidence has seen state demand and consumption fall. This is despite some recent replacement mine/development activity in Western Australia.

consumption is down.JPG

7. Where’s inflation?

Inflation is down and following the global trend. Hardly a problem of overheating just now.

inflation trending down like most of the world.JPG

8. Housing prices have tanked.

houseprices tanked.JPG

9. Scary household debt.

Household debt in Australia is close to extreme and accounts for nearly 200% of disposable income. This means households are more sensitive to shifts in household expenditure (like mortgage payments).

hhdebtnearly at 200% of income.JPG

10. The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

The Commission exposed many unsavory aspects of the Australian banking industry, to say the least. So it’s no real stretch to think the RBA has more than an inkling that families that were allowed to over-borrow (perhaps driven by lending targets/bonuses) will come under significant stress if interest rates are increased.

The wobbles…

Given these pressures on businesses and households, there should be little wonder why the RBA started its dovish backflip routine last week (a move most central bankers are getting good at), suggesting that the direction of the next interest rate movement, was frankly, still up in the air but not necessarily up.

Mike.


NextLevelCorporate is one of a very small number of independent corporate finance industry pioneers with decades of experience delivering conflict-free M&A, Growth Capital and Strategic Corporate Finance Advisory solutions. With a focus on solutions that capture competitive advantage, our sole objective is to help our clients to successfully buy, sell, finance or invest in companies and assets of any size, in and out of Australia.