27
Jul
2012

Since the carbon tax started: Edition 3

 

There is not a lot of new information in the past week, other than a few updates on financial market variables.  In the next few weeks, we will start to see some post-Carbon Tax data on jobs, job ads, inflation and sentiment and the like.  I will update this post as the information comes through.

This is the third edition of Since The Carbon Tax Started in which a range of market and economic indicators are examined in the context of the introduction of the carbon tax on 1 July 2012.   The post is a simple factually based report and at the moment draws no conclusions on causality, correlations or linkages between the carbon price starting and movements in the various indicators.

Here is the latest.

Indicator Change since end June 2012
Market Indicators

 

Official cash rate

No change

Australian dollar (vs USD)

+2.0%

10 year govt bond yield

-0.14 percentage points

ASX200

+2.1%

    Change in market cap of ASX

+$23 billion

Economic Indicators

 

RP Data house prices

+0.6%

      Change in Housing Wealth

+$24 billion

Westpac index of Consumer sentiment

+3.7%

 

 

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25
Jul
2012

No more crocodile tears on electricity

 

With all the hyped-up rubbish being spoken about the rise in electricity prices and how it will hurt the average householder, the June quarter inflation data present some home truths that comprehensively disprove the “poor bugger me” whingeing and whining about electricity prices that is frankly as boring as it is wrong.

Let’s check a few facts.

According to the weights used in the June quarter CPI, households spend a paltry 2.2% of their budget on electricity.  This compares with 5.5% spent on “meals out and takeaway foods”; 4.8% on “alcoholic beverages” and 2.4% on tobacco.

Yes, the average household spends 5 times more on takeaway, booze and cigarettes than they do on electricity.  Stick that in your pipe and smoke it.

There were a host of other interesting price changes in the CPI.  Here is a list of items whose price has fallen in the past year and the amount they have fallen:

Bread & cereal products                              -1.7%

Meat & seafoods                                            -2.1%

Dairy & related products                             -0.8%

Fruit & vegies                                                 -21.9%

Jams, honey & spreads                                 -0.4%

Clothes                                                           -0.7%

Men’s shoes                                                   -1.6%

Children’s shoes                                            -0.6%

Furniture & furnishings                               -1.2%

Household textiles                                        -1.3%

Household appliances etc                            -2.7%

Other non-durable h’hold product            -0.7%

Cars                                                                -1.6%

Audio, visual, computers & services            -9.8%

Books                                                              -0.1%

International travel                                      -2.3%

Equipment for sports & camping                -2.2%

Games, toys & hobbies                                  -6.0%

These items account for 24.4% of the CPI basket – more than 10 times the amount the average household spends on electricity.

All of that aside, when we know wages are growing at around a 3 to 4% pace and inflation is rising around a 1 to 2% pace, we also know that real wages are rising.

This mix of low inflation and moderate wage increases is locking in and sustaining rising living standards and well-being.  So no more crocodile tears about rising electricity prices and a bit more acknowledgement that there is a significant range of items whose price is actually falling.

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25
Jul
2012

Let’s fill the glass to three-quarters full – the RBA will cut in August

 

The RBA Governor Glenn Stevens says we should view the economy from the perspective of the glass half full, not half empty.  Fair point.

But why not set in place policy settings to fill that glass to three-quarters full so no one can be in any doubt about the robustness and underlying strength of the economy.  The risk of over-filling the glass with an inflationary effervescence seems remove given the starting point for inflation, global conditions and many of the forward indicators which point to an uptick in the unemployment rate in the months ahead.

The June quarter CPI showed that underlying inflation rose just 0.6% in the quarter for an annual increase of 2.0%.  In the full history of the data back to 1983, annual underlying inflation has only been lower in 3 quarters – suffice to say inflation right now is low.  Given the run of what are very high headline inflation rates from the mid 1970s through to 1983, it is safe to say that underlying inflation is at a level almost never seen in the last 4 decades.

This disinflation performance locks in a remarkable turnaround from the 2007 and 2008 inflation blow out, sparked by the politically biased decisions of the RBA under former Governor Ian Macfarlane, which saw underlying inflation hit 5.0%.

With inflation falling so sharply and the global risks remaining acute, the RBA would be wise to tweak the cash rate lower at its August meeting.  Mortgage and business interest rates are only 0.5 percentage points below long run averages while the AUD remains particularly strong.  In other words, monetary conditions are still tight.   The AUD anywhere above 1.00 or even 0.95 cents in the current climate is a handbrake on growth.

A 25 basis point interest rate cut would hardly unleash inflation given it is all but dead in the water, yet such a rate cut would help to give that mini-boost to confidence and cash flows and help push the AUD lower.  If the world economy is even weaker than forecast in the months ahead, the RBA will be glad to have gone early.

The inflation data alone are not why the RBA should cut interest rates again – even though they could be. It’s the global economy presenting a threat to Australian growth with the Eurozone lurching from bad to worse, the US spinning its wheels in the sand and China slowing.  It is difficult to see any one region where the outlook is strong or strengthening.  Commodity prices are generally heading lower

Interest rates around the world are staggering low – bond yields are negative in half a dozen countries, yet a sustained economic upswing is elusive.  This is disconcerting and a major threat to the outlook for the Australian economy.

The RBA knows it should cut and it probably will.

 

 

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25
Jul
2012

Underlying inflation – for the record

 

The ABS publish the index numbers that form the basis of the 2 measures of underlying inflation – they are in Table 8 of the ABS release.  http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6401.0Jun%202012?OpenDocument

Using these numbers, we can confirm what the actual increase in the underlying inflation measures in the June quarter was rather than use a simple average of 1.9% and 2.0% which is 1.95%.

For the record, using the specific indices published by the ABS, the average of the 2 measures of underlying inflation was 0.60% for the June quarter after a rise of 0.37% in the March quarter.  Over the year to June quarter, the annual rise in underlying inflation was 1.96% – so there you are – 2.0%.

The underlying inflation rate is not below the bottom of the RBA target band.

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23
Jul
2012

The Budget Surplus and the Sausage Machine

 

Any projections concerning the bottom line of the Budget are only as good as the parameters underpinning the estimates of government spending and revenue.

Make a guess that the economy will be a bit weaker than the Treasury Budget-time projections and voila!  - the Budget plummets into deficit.  Make a guess that the economy is a bit stronger than the Treasury Budget-time projections and voila! – the Budget surplus comes in a few billion dollars larger than Treasury’s projection.

My friends at Deloitte Access Economics have presented a view of the economy that is a bit weaker than that presented by Treasury at Budget-time.   Who knows, DAE might be right.  But they might not.  DAE’s forecasting record is not much better than average.

I happen to think that the recent run of news on jobs, GDP, agricultural prices, interest rates and consumer spending will see the economy perform a bit better than Treasury was expecting so the 2012-13 surplus is likely to be a great deal bigger than the Budget-time forecast – perhaps close to $5 billion.

See the issue here?

A stronger than expected economy means less government spending and more revenue; and vice versa.  No more, no less.  And this far out from the end of 2012-13 it is way too early to be sure.

All DAE have done is apply its economic forecasts for the economy to the budget spending and revenue measures and come up with a deficit.  All I have done is apply my economic forecasts to the budget spending and revenue measures and come up with a bigger surplus.  All Treasury did was apply its forecasts for the economy and came up with a $1.5 billion surplus.

It is way, way too early to know who will be right.   I happen to think I will be and that DAE are a bit too gloomy.  We will find out the next step at the Mid-Year Economic and Fiscal Outlook which is likely to released in November or December.  Until then Budget surplus or deficit forecasts are only as good as the forecasts for the economy.

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22
Jul
2012

Down, down, prices are down

 

On Wednesday, the consumer price index will show that Australia has maintained the status quo of very low inflation.  This despite the fact that the economy is growing and unemployment is low.

The underlying inflation rate – the rate that matters most to the RBA and financial markets – could fall to a record low (data back to 1983).

Since 1983 and with 117 quarterly observations, there have been only 3 instances where underlying inflation has been below 2.0% – a little patch from the September quarter 1997 to the March quarter 1998.  The low point was 1.8%.  Other than that, underlying inflation has been 2.0% or more for the other 114 quarterly observations.

If the quarterly underlying inflation reading on Wednesday comes in at 0.5% and there are no revisions, the annual underlying inflation rate will equal the record low of 1.8%.  This will represent a quite remarkable turn in inflation pressure given the underlying inflation rate spiked to 5.0% in 2008 as a result of the reckless fiscal profligacy of the Howard government in its last couple of years in office.  That poor handling of the Budget saw the RBA hike the cash rate to 7.25% with mortgage rates hitting a purse numbing 9.6%.

One important benefit from the sharp pull-back in inflation over the last few years is lower interest rates.  Currently, the cash rate is 3.5% and is set to go lower, while mortgage interest rates are reasonably comfortable at 6.8%.  These lower interest rates nurture investment and support demand at a time of uneven growth in the economy.

From the perspective of the household sector, low inflation is like manna from heaven or at least from the policy makers in Canberra and at the RBA.  Low inflation boosts purchasing power given we have wages growth around 3.5% and most pensions and welfare payments are indexed.  For example, if inflation is under 2% and wages and pensions are rising by 3 to 4%, you can buy most stuff (goods and services) with your fortnightly pay or welfare payment.  Your living standards are rising in a low inflation environment.

All of which means there is a lot of good news in the having low inflation and that good news is set to come home loud and clear when the CPI is released this Wednesday.

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19
Jul
2012

Since the carbon tax started: Edition 2

 

This is the second edition of Since The Carbon Tax Started in which a range of market and economic indicators are examined in the context of the introduction of the carbon tax on 1 July 2012.   The post is a simple factually based report and at the moment draws no conclusions on causality, correlations or linkages between the carbon price starting and movements in the various indicators.

Here is the latest.

Indicator Change since end June 2012
Market Indicators

 

Official cash rate

No change

Australian dollar (vs USD)

+1.8%

10 year govt bond yield

-0.12 percentage points

ASX200

+1.9%

Economic Indicators

 

RP Data house prices

+0.6%

     - Change in Housing Wealth

+$24 billion

Westpac index of Consumer sentiment

+3.7%

 

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18
Jul
2012

Some Hokey Pokey on Pokies

 

A big story today is the news that poker machine revenue in Queensland rose, in annual terms, by 7% in May and 12% in June.

In a wonderful case of correlation equals causation, the Federal Government’s compensation for the carbon tax is being cited as the reason for this lift, with people allegedly spending their “windfall” on pokies rather than using it for something else.  I see the price of eggs in China rose in May and June – was that a result of the carbon tax compensation?

A quick look at a few facts suggests that the rise in poker machine revenue may have little to do with the carbon tax compensation.

According to the official retail trade data from the ABS (a very good proxy for people’s propensity to spend or save), retail spending in Queensland rose by 6% in the year to May (5.6% in original terms, but I’ve rounded it to match the numbers used in the media today).  This is just 1% shy of the growth in pokie turnover in the comparable period.  Statistically, the different between pokie turnover and retail spending is nothing.

The June retail spending data are not released yet, but I’ve got a sneaking suspicion that the annual growth in Queensland will be close to double digits.  We’ll see.

What is also ignored in the analysis today is the fact that household cash flows in the May and June period got a nice boost by a sharp fall in petrol prices and interest rate cuts from the RBA.  I have no idea whether the extra dollars in people’s pockets as a result of these two events saw people drop a few extra dollars into pokies or not… but neither does Senator Xenophon or anyone else.

Suffice to say, the link between the carbon tax compensation payment and the rise in pokie revenue may simply be coincidental.

I must loudly and clearly state that poker machines are a horrid invention and the less people use them, the better.  Like any dreadful disease, I would love to see them disappear form the face of the earth – this is no defence of poker machines, rather a defence of common sense economics.

My quite ridiculous spoof article a few days ago that linked the $28 billion rise in household wealth due to higher house prices in the fortnight since the carbon tax started was a case in point.   There is no correlation between the carbon tax and house prices and therefore household wealth.

None.  Zero.  Zilch.

I hope the people who presented a quite strong critique of that article apply the same blow torch to yet-to-be-proven correlations between the carbon tax compensation and the rise in poker machine turnover.

It might be true that people in Queensland and elsewhere did spend a disproportionate amount of their carbon tax compensation on poker machines… but then again, it might not.

In the High Court of economics, I need more evidence before I make a decision either way.

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15
Jul
2012

Households are $28 billion richer since the carbon tax started

 

The value of all of the dwellings in Australia is approximately $4 trillion.  It is the dominant component of household wealth.

When dwelling prices rise, the boost to wealth no doubt feeds into a positive assessment of personal finances for many people.  Conversely when dwelling prices fall, there’s no doubt that many feel under some form of financial pressure.

While there is absolutely and utterly no correlation between house prices and the policy to impose a price on carbon, it is interesting to note that according to the RPData house price series, house prices have risen 0.7% since 30 June 2012.

This 0.7% rise on the $4 trillion value of dwellings means that household wealth has been boosted by around $28 billion since the carbon price took effect.  This means that on average, each home owner is about $3,500 to $4,000 wealthier than a fortnight ago, before the carbon price was introduced.

Just saying.

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12
Jul
2012

Since the carbon tax started: Edition 1

 

Market Economics will be providing a regular post called Since The Carbon Tax Started in which a range of market and economic indicators will be monitored.  The post will be a simple factually based report which will present a running tally of economic and market developments since the carbon tax was introduced in Australia on 1 July 2012.

The market data is the most readily available.  Not much hard economic news is available but it will slowly come through in the months ahead.

The results do not generally apportion causality nor form any specific link between the introduction of the carbon price and trends in the indicators covered, but that said, nor does much of the fear mongering about the negative effects on Australia of implementing a price on carbon.

Indicator Change since end June 2012
Market Indicators

 

Official cash rate

No change

Australian dollar (vs USD)

+0.6%

10 year govt bond yield

-0.04 percentage points

ASX200

No change

Economic Indicators

 

RP Data house prices

+0.4%

Westpac index of Consumer sentiment

+3.7%

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