Originally published by Rivkin Securities
After swiftly recovering from a poor start to the week, the S&P/ASX 200 Accumulation Index eased off again on Friday to finish out the week 0.73% lower than where it started, but not after seeing some interesting positives emerge for the Aussie economy. Chinese GDP beat forecasts; New Zealand/UK/Canada inflation releases all disappointed, which means lower rates for longer in those countries and, in turn, will keep the Reserve Bank of Australia under even greater pressure to avoid a rate rise (otherwise our currency will keep strengthening on relative interest rate speculation); the Australian unemployment rate came in at 5.6%; and the iron ore price tested and closed above US$70 per tonne before easing back just below that on Friday.
If the iron ore price can keep stretching higher, then it’s possible the government could see a nice budget revision for the first time in many years. Given this commodity strength is such a dominant theme, I figured it was worth kicking off the week with a closer look at the latest economic news coming out of China.
While developed nations scrambled to pick up the pieces of their economy after the GFC, China managed to grow its GDP by more than double in the five years to 2011. This was not sustainable, and the depth of credit that was inflating the economy had to be reined in by the government, which implemented measures to pull back its annual GDP growth rate from above 12% in 2010 to 6.7% in 2016 – a HUGE shift. As we know, China is Australia’s largest two-way trading partner and its annual GDP in dollar terms is about two-thirds of that of the USA. So while Australian political parties have been trying to convince the public that they have had any control over balancing budgets during the last decade, the elephant in the room has been a Chinese government that has vacuumed significant excess growth out of its economy so not to create devastating asset bubbles. In turn, that left a hole in our budget from mining tax revenues.
However (and those who understand the irony of ‘The Lucky Country’ won’t like this), I for one am quite pleased to see signs that the Chinese GDP growth rate is shooting slightly ahead of its own government’s target of 6.5% (it came at 6.9% last Monday). I’m a pragmatist, I believe in the ‘whatever works’ theory. If it is the case that we need to trade on our luck and depend upon a growing China for continuing domestic growth, then so be it. It’s neither the place nor the potential of our government to create structures that will see us grow in a vacuum (business people and consumers take care of those things), and I’m shameless enough to welcome a future of prosperity that is tied to the exports of minerals and services like finance, technology and healthcare to a region that is well-fed by Chinese growth.
There are some who would like to get up each day and bash the Australian economy for what it is and pray for the demise of our housing market etc., but I sit here and I see an economy that is steadily producing post-GFC growth that is healthy, strong employment, and enviable relationship with China and emerging Asia, plenty of foreign investment interest and a long track record of sound reserve bank management. And I’m not being optimistic, if the data were telling me the opposite I’d be telling you our economy sucks. But it doesn’t, and so I remain very positive on the dynamics for Australian businesses listed on the ASX, especially given that China is showing signs of emerging from a controlled, successful economic slowdown.
The data to watch out for this week will be (all AEST):
- Wednesday 00:00 US Consumer Confidence
- Wednesday 11:30 Australian CPI (2.2% expected)
- Wednesday 18:30 UK GPD
- Thursday 04:00 US rate decision
- Friday 09:30 Japanese CPI (0.4% expected)
- Friday 22:00 German CPI (1.5% expected)
- Friday 22:30 Canadian GDP
- Friday 22:30 US GDP