RBNZ Official Cash Rate unchanged at 1.75 percent

The Reserve Bank today left the Official Cash Rate (OCR) unchanged at 1.75 percent.

The outlook for global growth continues to gradually improve.  While global inflation remains subdued, there are some signs of emerging pressures. Commodity prices have continued to increase and agricultural prices are picking up.  Equity markets have been strong, although volatility has increased.  Monetary policy remains easy in the advanced economies but is gradually becoming less stimulatory.

GDP was weaker than expected in the fourth quarter, mainly due to weather effects on agricultural production. Growth is expected to strengthen, supported by accommodative monetary policy, a high terms of trade, government spending and population growth. Labour market conditions are projected to tighten further.

Residential construction continues to be hindered by capacity constraints. The Kiwibuild programme is expected to contribute to residential investment growth from 2019. House price inflation remains moderate with restrained credit growth and weak house sales.

CPI inflation is expected to weaken further in the near term due to softness in food and energy prices and adjustments to government charges. Tradables inflation is projected to remain subdued through the forecast period. Non-tradables inflation is moderate but is expected to increase in line with a rise in capacity pressure.  Over the medium term, CPI inflation is forecast to trend upwards towards the midpoint of the target range. Longer-term inflation expectations are well anchored at 2 percent.

Monetary policy will remain accommodative for a considerable period.  Numerous uncertainties remain and policy may need to adjust accordingly.


COBA and the Future Of Banking

I had the opportunity to participate in the Customer Owned Banking Association conference yesterday.  I hold the view the these smaller, but more customer aligned financial services organisation are Australia’s best kept secret.  In fact, often they offer better rates, and a distinctive set of cultural values. But they need to drive a different path to the majors, when the economics of their businesses are stressed.

The current environment with the more than 20 inquiries including the Royal Commission and the higher funding costs as represented by the 20 basis point spread growth in the A$ Bill/OIS raises a whole set of questions. Plus the FED is predicting a further 8 rate hikes in the USA over the next couple of years, taking the US rate well above 3%! That will impact here.

I made a video blog of my visit to Sydney, and included extracts from a live radio interview I did for 6PR on interest rates, and my comments from a panel discussion regarding the future of banking.




Fed Hikes Again, and More To Come

The Fed lifted, as expected. The “dots” chart also shows more to come.  The supporting data shows the economic is running “hot” and inflation is expected to rise further. This will have global impact.  The era of low interest rates in ending. The QE experiment is also over, but the debt legacy will last a generation.

This chart is based on policymakers’ assessments of appropriate monetary policy, which, by definition, is the future path of policy that each participant deems most likely to foster outcomes for economic activity and inflation that best satisfy his or her interpretation of the Federal Reserve’s dual objectives of maximum employment and stable prices.

Each shaded circle indicates the value (rounded to the nearest ⅛ percentage point) of an individual participant’s judgment of the midpoint of the  appropriate target range for the federal funds rate or the appropriate target level for the federal funds rate at the end of the specified calendar year or over the longer run.

Information received since the Federal Open Market Committee met in January indicates that the labor market has continued to strengthen and that economic activity has been rising at a moderate rate. Job gains have been strong in recent months, and the unemployment rate has stayed low. Recent data suggest that growth rates of household spending and business fixed investment have moderated from their strong fourth-quarter readings. On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below 2 percent. Market-based measures of inflation compensation have increased in recent months but remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The economic outlook has strengthened in recent months. The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and labor market conditions will remain strong. Inflation on a 12-month basis is expected to move up in coming months and to stabilize around the Committee’s 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-1/2 to 1-3/4 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

Voting for the FOMC monetary policy action were Jerome H. Powell, Chairman; William C. Dudley, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Loretta J. Mester; Randal K. Quarles; and John C. Williams.

ABS Confirms Sydney Home Price Falls

The ABS released their home price data series to December 2017 today.  Sydney prices fell over the past quarter, along with Darwin. Other centres saw a rise, but the rotation is in hand.

The price index for residential properties for the weighted average of the eight capital cities rose 1.0% in the December quarter 2017. The index rose 5.0% through the year to the December quarter 2017.

The capital city residential property price indexes rose in Melbourne (+2.6%), Perth (+1.1%), Brisbane (+0.9%), Hobart (+3.9%), Canberra (+1.7%) and Adelaide (+0.6%) and fell in Sydney (-0.1%) and Darwin (-1.5%).

Annually, residential property prices rose in Hobart (+13.1%), Melbourne (+10.2%), Canberra (+5.7%), Sydney (+3.8%), Adelaide (+3.6%) and Brisbane (+2.1%) and fell in Darwin (-6.3%) and Perth (-1.7%).

The total value of residential dwellings in Australia was $6,869,006.7m at the end of the December quarter 2017, rising $92,858.9m over the quarter.

The mean price of residential dwellings rose $6,500 to $686,700 and the number of residential dwellings rose by 40,400 to 10,003,100 in the December quarter 2017.

What Are the Economic Impacts of Climate Change?

Strategically, the economic risks relating to the changing climate are one of the most significant challenges we face. But what are the potential long term impacts likely to be? In this Federal Reserve of St. Louis, on the economy blog,  this important subject is explored.

We think there is a need for similar modelling to be done in Australia, as many of the most populated areas are most likely to be impacted.

How might climate change impact the economy over the long term? Some potential impacts include increased mortality, higher demand for electricity and reduced yields for certain crops.

At a recent Dialogue with the Fed presentation, William Emmons, lead economist with the St. Louis Fed’s Center for Household Financial Stability, highlighted research1 that identified geographic “winners and losers” on a county-by-county level across the United States.

Looking out to the year 2090, the findings showed that the St. Louis region could expect a significant impact on its economic activity, Emmons said.

“And if you zoom in and look at our region, [the researchers’] estimates are that we could lose the economic equivalent of 5 to 10 percent of GDP as a result of these effects,” he said, noting that impacts would be gradual.

Homeless numbers will keep rising until governments change course on housing

From The Conversation.

Ten years ago the Australian government launched a National Partnership Agreement on Homelessness (NPAH). It injected A$800 million into homelessness services and A$300 million to build 600 new homes for people experiencing homelessness. It was later announced that another A$400 million would be available under the National Affordable Housing Agreement (NAHA) to build new housing and supported accommodation for the homeless. Total recurrent expenditure (at 2016-17 prices) on homelessness services has increased by 28.8%, from A$634.2 million in 2012-13 to A$817.4 million in 2016-17.

But despite this, the number of people experiencing homelessness and the rate of homelessness have both increased. Our research points to problems in the public housing system as one of the more important causes of these increases.

According to census figures released on Wednesday by the Australian Bureau of Statistics (ABS), the number of homeless people in Australia has risen by 14% to 116,427. The rate of homelessness has increased from 47.6 people per 10,000 of the population in 2011, to 49.8 per 10,000 now. (The ABS defines homelessness here.)

There is some good news: the numbers of Indigenous homeless and homeless children and youth (aged 12-18) have declined by 26%, 11% and 7% respectively since 2011. But on the downside, increases are particularly pronounced in New South Wales (where the homelessness rate rose by 27% and among people aged over 65 (by just over 30%) and overseas-born migrants (by 40%).

Why are we still going backwards?

Changes in Australian housing and welfare systems and wider social and economic developments appear to have more than offset any benefits from the NPAH and NAHA. Our research sheds some light on the role played by Australia’s housing system. Using the internationally recognised and unique Journeys Home longitudinal survey, we find that public housing is the most important factor in preventing homelessness among vulnerable people.

Public housing is particularly effective because it is affordable. It has also traditionally offered a long-term refuge for precariously housed people. This is because public housing leases provide the benefits of security of tenure commonly associated with home ownership.

It is perhaps no accident that NSW was one of the first states to introduce fixed-term tenancies in public housing. This eroded one of the major attributes of tenure, in a state that has seen relatively large increases in homelessness numbers.

The empirical evidence also suggests that community housing fails to provide the same protection for people at risk of homelessness. While community housing is affordable, the security of tenure is weaker, which may explain these findings.

Despite such evidence, the stock of public housing continued to decline between the 2011 and 2016 censuses. State government-initiated transfers of stock to the community housing sector accelerated this trend. In 2013 Australia had a public housing stock of 325,226 dwellings. This declined by 3.2% to 314,864 usable dwellings in 2017.

Where are the additional homeless coming from?

One of the more alarming changes is a sharp increase in the number of homeless people over 65. This partly reflects Australia’s ageing population. However, the increase is such that the elderly’s share of the total homelessness count has also risen.

Furthermore, our research suggests that this trend could become protracted. This is because the homeless elderly have much less chance of escaping into formal housing than younger people experiencing homelessness. We have little understanding of the reasons for this, but gaps in service provision to the aged could be partly responsible.

The other group who feature prominently among the homeless are overseas migrants. They now make up 46% of the homeless, despite representing just 28% of the Australian population. The number of homeless overseas-born migrants has soared by 40% since the 2011 Census, from 38,085 to 53,606 people.

It turns out that homeless overseas-born migrants are concentrated among those living in severely overcrowded dwellings – a little over half of those living in these conditions were born overseas. We know little about these homeless people. Discrimination could be a factor, though some characterise this group as students living in group households who should not be considered homeless. But this is speculation and further study is certainly required.

In view of the latest census results, it is clear to us that governments need to reassess their approach to what is turning into an intractable social problem.

We do not deny that situational factors, such as drug abuse, domestic violence and so forth, are important here. But equally, there is strong evidence that structural problems in our housing market are a significant cause of growth in the numbers of homeless people.

Until these problems are resolved, service provision and support will remain a band-aid masking deeper social and housing system issues.

Gavin Wood, Emeritus Professor of Housing and Housing Studies, RMIT University; Guy Johnson, Professor, Urban Housing and Homelessness, RMIT University; Juliet Watson, Lecturer, Urban Housing and Homelessness, RMIT University; Rosanna Scutella, Senior Research Fellow, Centre for Applied Social Research, RMIT University

The Mortgage Industry Omnishambles – The Property Imperative 17 March 2018

Today we examine the Mortgage Industry Omnishambles. And it’s more than just a flesh wound!

Welcome to the Property Imperative Weekly to 17th March 2018. Watch the video, or read the transcript.

In this week’s review of property and finance news we start with the latest January data from the ABS which shows lending for secured housing rose 0.14% or 28.8 million to $21.1 billion. Secured alterations fell 1%, down $3.9 million to $391 million.  Fixed personal loans fell 0.1%, down $1.2 million to $4.0 billion, while revolving loans fell 0.06%, down $1.3 million to $2.2 billion.

Investment lending for construction of dwellings for rent rose 0.86% or $10 million to $1.2 billion. Investment lending for purchase by individuals fell 1.34%, down $127.7 million to $9.4 billion, while investment lending by others rose 7.7% up $87.2 million to $1.2 billion.

Fixed commercial lending, other than for property investment rose 1.25% of $260.5 million to $21.1 billion, while revolving commercial lending rose 2.5% or $250 million to $10.2 billion.

The proportion of lending for commercial purposes, other than for investment housing was 45% of all commercial lending, up from 44.5% last month.

The proportion of lending for property investment purposes of all lending fell 0.1% to 16.6%.

So, we are seeing a rotation, if a small one, towards commercial lending for more productive purposes. However, lending for property and for investment purposes remains quite strong. No reason to reduce lending underwriting standards at this stage or weaken other controls.

But this also explains the deep rate cuts the banks are now offering – even to investors – ANZ Bank and the National Australia Bank were the last of the big four to announce cuts to their fixed rates, following similar announcements from the Commonwealth Bank and Westpac. NAB has dropped its five-year fixed rate for owner-occupied, principal and interest home loans by 50 basis points, from 4.59 per cent to 4.09 per cent. The bank has also reduced its fixed rates on investor loans by up to 35 basis points, with rates starting from 4.09 per cent. And last week ANZ also dropped fixed rates on its “interest in advance”, interest-only home loans by up to 40 basis points, with rates starting from 4.11 per cent. Further, fixed rates on its owner-occupied, principal and interest home loans have fallen by 10 basis points, with rates now starting from 3.99 per cent.  This fixed rate war shows our big banks are not pricing in a rate hike anytime soon.

But we think these offers will likely encourage churn among existing borrowers, rather than bring new buyers to the market.  For example, the ABS housing finance data showed that in original terms, the number of first home buyer commitments as a percentage of total owner occupied housing finance commitments rose to 18.0% in January 2018 from 17.9% in December 2017 – and this got the headline from the real estate sector, but the absolute number of first time buyers fell, thanks mainly to falls of 22.3% in NSW and of 13.3% in VIC. More broadly, there were small rises in refinancing and investment loans for entities other than individuals.

The latest data from CoreLogic shows home prices fell again this week, with Sydney down for the 27th consecutive week, and their index registering another 0.09% drop, whilst auction volumes were down on last week. They say that last week, the combined capital city final auction clearance rate fell to 63.3 per cent across a lower volume of auctions with 1,764 held, down from the 3,026 auctions over the week prior when a slightly higher 63.6 per cent cleared.  The weighted average clearance rate has continued to track lower than results from last year; when over the corresponding week 75.1 per cent of the 1,473 auctions sold.

But the strategic issues this week relate to the findings from the Royal Commission and from the ACCC on mortgage pricing. I did a separate video on the key findings, but overall it was clear that there are significant procedural, ethical and even legal issue being raised by the Commission, despite their relatively narrow terms of reference. They cannot comment on bank regulation, or macroprudential, but the Inquiries approach is to examine a series of case studies, from the various submissions they have received, and then apply forensic analysis to dig into the root causes examining misconduct. The question of course is, do the specific examples speak to wider structural questions as we move from the specific instances. We discussed this on ABC Radio this week.

From NAB we heard about referrer’s providing leads to the Bank, outside normal lending practices and processes, and some receiving large commissions, despite not being in the ambit of the responsible lending code. From CBA we heard that the bank was aware of the conflict brokers have especially when recommending an interest only loan, because the trail commission will be higher as the principal amount is not repaid. And from Aussie, we heard about their reliance on lenders to trap fraud, as their own processes were not adequate. And we also heard of examples of individual borrowers receiving loans thanks to poor conduct, or even fraud. We also heard about how income and expenses are sometimes misrepresented. So, the question is, do these various practices show up more widely, and what does this say about liar loans, and mortgage systemic risk?

We always struggled to match the data from our independent household surveys with regards to loan to income, and loan to value, compare with loan portfolios we looked at from the banks. Now we know why. In some cases, income is over stated, expenses are understated, and so loan serviceability is a potentially more significant issue than the banks believe – especially if interest rates rise. In fact, we saw very similar behaviours to the finance industry in the USA before the GFC, suggesting again we may see the same outcomes here. One other point, every lender is now on notice that they need to look at their current processes and back book, to test affordability, serviceability and risk. This is a big deal.

I will also be interested to see if the Commission turns to look at foreclosure activity, because this is the other sleeper. Mortgage delinquency in Australia appears very low, but we suspect this is associated with heavy handed forced sales. Something again which was apparent around the GFC.

More specifically, as we said in a recent blog, the role and remuneration models for brokers are set for a significant shakedown.

Turning to the ACCC report on mortgage pricing, this was also damming. Back in June 2017, the banks indicated that rate increases were primarily due to APRA’s regulatory requirements, but now under further scrutiny they admitted that other factors contributed to the decision, including profitability. Last December, the ACCC was called on by the House of Representatives Standing Committee on Economics to examine the banks’ decisions to increase rates for existing customers despite APRA’s speed limit only targeting new borrowers. The investigation falls under the ACCC’s present enquiry into residential mortgage products, which was established to monitor price decisions following the introduction of the bank levy. Here are the main points.

  1. Banks raised rates to reach internal performance targets: concern about a shortfall relative to performance targets was a key factor in the rate hikes which were applied across the board. Even small increases can have a significant impact on revenue, the report found. And the majority of existing borrowers would likely not be aware of small changes in rates and would therefore be unlikely to switch.
  2. A shared interest in avoiding disruption: Instead of trying to increase market share by offering the lowest interest rates, the big four banks were mainly preoccupied and concerned with each other when making pricing decisions. It shows a failure in competition (my words).
  3. Reputation is everything: The banks it seems were very conscious of how they should explain changes. As it happens, blaming the regulators provides a nice alibi/
  4. For Profit: Internal memos also spoke of the margin enhancement equating to millions of dollars which flowed from lifting investment loans.
  5. New Loans are cheaper, legacy rates are not. Banks of course are offering deep discounts to attract new customers, funded by the back book repricing. The same, by the way, is true for deposits too.

The Australian Bankers Association “silver lining” statement on the report said they welcomed the interim report into residential mortgages, which clearly shows very high levels of discounting in the Australian home loan market. It’s clear that competition is delivering better deals for customers, shopping around works and Australians should continue to do so to get the best discounts on the advertised rate. But they are really missing the point!

We will see if the final report changes, but if not these are damming, but not surprising, and again shows the pricing power the major lenders have.

So to the question of future rate rises. The FED meets this week, and the expectation is they will lift rates again, especially as the TRUMP tax cuts are inflationary, at a time when the US economy is already firing. In a recent report Fitch Ratings said that Central banks are becoming less cautious about normalising monetary policy in the face of strong growth and diminishing spare capacity. They expect the Fed to raise rates no less than seven times before the end of next year. And while still sounding tentative, the European Central Bank is clearly laying firm groundwork for phasing out QE completely later this year. They now also expect the Bank of England to raise rates by 25bp this year.

Guy Debelle, RBA Deputy Governor spoke on “Risk and Return in a Low Rate Environment“.  He explored the consequences of low rates, on asset prices, and asks what happens when rates rise. He suggested that we need to be alert for the effect the rise in the interest rate structure has on financial market functioning, and that investors were potentially too complacent.  There are large institutional positions that are predicated on a continuation of the low volatility regime remaining in place. He had expected that volatility would move higher structurally in the past and this has turned out to be wrong. But He thinks there is a higher probability of being proven correct this time. In other words, rising rates will reduce asset prices, and the question is – have investors and other holders of assets – including property – been lulled into a false sense of security?

All the indicators are that rates will rise – you can watch our blog on this. Rising rates of course are bad news for households with large mortgages, exacerbated by the possibility of weaker ability to service loans thanks to fraud, and poor lending practice. We discussed this, especially in the context of interest only loans, and the problems of loan resets on the ABC’s 7:30 programme on Monday.  We expect mortgage stress to continue to rise.

There was more discussion this week on Housing Affordability. The Conversation ran a piece showed that zoning is not the cause of poor affordability, and neither is supply of property. Indeed planning reform they say is not a housing affordability strategy.  Australia needs a more realistic assessment of the housing problem. We can clearly generate significant dwelling approvals and dwellings in the right economic circumstances. Yet there is little evidence this new supply improves affordability for lower-income households. Three years after the peak of the WA housing boom, these households are no better off in terms of affordability. In part, this may reflect that fact that significant numbers of new homes appear not to house anyone at all. A recent CBA report estimated that 17% of dwellings built in the four years to 2016 remained unoccupied. If we are serious about delivering greater affordability for lower-income Australians, then policy needs to deliver housing supply directly to such households. This will include more affordable supply in the private rental sector, ideally through investment driven by large institutions such as super funds. And for those who cannot afford to rent in this sector, investment in the community housing sector is needed. In capital city markets, new housing built for sale to either home buyers or landlords is simply not going to deliver affordable housing options unless a portion is reserved for those on low or moderate incomes.

But they did not discuss the elephant in the room – booming credit. We discussed the relative strength of different drivers associated with home price rises in a separate, and well visited blog post, Popping The Housing Affordability Myth. But in summary, the truth is banks have pretty unlimited capacity to create more loans from thin air – FIAT – let it be. It is not linked to deposits, as claimed in classic economic theory.  The only limit on the amount of credit is people’s ability to service the loans – eventually. With that in mind, we built a scenario model, based on our core market model, which allows us to test the relationship between home prices, and a series of drivers, including population, migration, planning restrictions, the cash rate, income, tax incentives and credit.

We found the greatest of these is credit policy, which has for years allowed banks to magic money from thin air, to lend to borrowers, to drive up home prices, to inflate the banks’ balance sheet, to lend more to drive prices higher – repeat ad nauseam! Totally unproductive, and in fact it sucks the air out of the real economy and money directly out of punters wages, but make bankers and their shareholders richer. One final point, the GDP calculation we use in Australia is flattered by housing growth (triggered by credit growth). The second driver of GDP growth is population growth.  But in real terms neither of these are really creating true economic growth. To solve the property equation, and the economic future of the country, we have to address credit. But then again, I refer to the fact that most economists still think credit is unimportant in macroeconomic terms! The alternative is to continue to let credit grow well above wages, and lift the already heavy debt burden even higher. Current settings are doing just that, as more households have come to believe the only way is to borrow ever more. But, that is, ultimately unsustainable, and this why there will be an economic correction in Australia, and quite soon. At that point the poor mortgage underwriting chickens will come home to roost. And next time we will discuss in more detail how these scenarios are likely to play out. But already we know enough to show it will not end well.

US Hourly Earnings Up Just 0.4% In Past Year

Data from the US Bureau of Labor Statistics  shows from February 2017 to February 2018, real average hourly earnings increased 0.4 percent, seasonally adjusted. The increase in real average hourly earnings combined with a 0.3-percent increase in the average workweek resulted in a 0.6-percent increase in real average weekly earnings over the 12-month period.

Real average hourly earnings for production and nonsupervisory employees increased 0.2 percent from January to February, seasonally adjusted. This result stems from a 0.3-percent increase in average hourly earnings combined with a 0.1-percent increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers.

Real average weekly earnings increased 0.8 percent over the month due to the increase in real average hourly earnings combined with a 0.6-percent increase in average weekly hours.

From February 2017 to February 2018, real average hourly earnings increased 0.1 percent, seasonally adjusted. The increase in real average hourly earnings combined with a 0.6-percent increase in the average workweek resulted in a 0.7-percent increase in real average weekly earnings over this period.

NOTE: Seasonally adjusted data are used for estimates of percent change from the same month a year ago for current and constant average hourly and weekly earnings. Special techniques are applied to the CES hours and earnings data in the seasonal adjustment process to mitigate the effect of certain calendar-related fluctuations. Thus, over-the-year changes of these hours and earnings are best measured using seasonally adjusted series. A discussion of the calendar-related fluctuations in the hours and earnings data and the special techniques to remove them is available in the February 2004 issue of Employment and Earnings or at www.bls.gov/ces/cesfltxt.htm.

Global Growth Is Booming, Central Banks Turning Less Cautious

The global economy is experiencing boom-like growth conditions and central banks are becoming less cautious as inflation risks rise, according to Fitch’s latest “Global Economic Outlook” (GEO). As a result, Fitch predicts further interest rate rises over the next couple of years.

The US, eurozone and China are all likely to grow well above trend in 2018 and global economic growth is set to remain above 3% for three consecutive years until 2019, a performance not achieved since the mid 2000s.

“The acceleration in private investment, pro-cyclical US fiscal easing and global monetary policies that are still very loose are all boosting growth in the advanced economies, while high commodity prices and the weakening of the dollar have underpinned the emerging market recovery. China is gently touching the brakes but is still prioritising high growth in the near term,” said Brian Coulton, Chief Economist at Fitch.

Growth in advanced economies is benefitting from a strengthening investment cycle as business sentiment improves, external demand picks up and labour resources become increasingly scarce. Tax reforms in the US could also boost investment. The pick-up in bank lending in the eurozone is particularly helping small and medium-sized firms, which account for half of capex, but reduced economic and policy uncertainty and rising capacity utilisation rates are also supporting the investment outlook. We have revised up investment forecasts for the US and the eurozone.

Consumer spending in advanced economies is benefitting from the ongoing tightening in labour markets. Global monetary policy settings remain highly accommodative and credit conditions very easy despite the recent increases in bond yields. US fiscal policy is being eased aggressively, with the federal deficit likely to rise to over 5% of GDP by 2019 from around 3.5% in 2017.

Strong growth and declining unemployment have increased inflation risks in the advanced economies but a sharp surge in inflation still seems unlikely. The trade-off between inflation and unemployment has flattened in recent years, headline unemployment rates may understate slack and rising investment could boost productivity, holding down unit labour costs. Nevertheless, diminishing spare capacity is cementing the move towards monetary policy normalisation.

“Central banks are becoming less cautious about normalising monetary policy in the face of strong growth and diminishing spare capacity. We expect the Fed to raise rates no less than seven times before the end of next year. And while still sounding tentative, the ECB is clearly laying firm groundwork for phasing out QE completely later this year. We now also expect the BoE to raise rates by 25bp this year,” added Coulton.

We expect China’s economy to slow in 2018 as credit growth decelerates, housing sales flatten off and investment growth eases. Macro-prudential tightening has been a bit more concerted than expected but the authorities have recently reaffirmed their commitment to maintaining high growth rates in the short term. The wider emerging-market recovery has been helped by a weaker dollar and rising commodity prices but these benefits are likely to fade. We expect oil prices to fall back below USD60 per barrel (Brent) and the dollar to be supported by faster Fed rate rises and improving US growth prospects.

We have again upgraded growth forecasts as the eurozone recovery powers ahead, US fiscal policy eases by more than anticipated and investment prospects improve. US growth has been revised up to 2.7% in 2018 and 2.5% in 2019 from 2.5% and 2.2%, respectively, in our December 2017 GEO. Eurozone growth has been revised up to 2.5% in 2018 and 1.8% in 2019 from 2.2% and 1.7%, respectively. China’s 2018 forecast has also been revised up slightly (by 0.1pp) but growth is still expected to slow to 6.5% from 6.9% in 2017. Growth forecasts for Japan and the UK are unchanged for 2018 at 1.3% and 1.4%, respectively.

The key risks to the forecasts are a sharp pick-up in US core inflation – which would necessitate more abrupt, growth-negative adjustments in interest rates – and a major escalation in global trade protectionism. US-China trade tensions seem highly likely to increase in coming months but the situation would have to deteriorate quite dramatically to adversely affect the near-term global growth outlook.

SME Funding an Issue Says New Report

The latest edition of the Scottish Pacific SME Growth Index has been released. It gives an interesting snapshot on the critically important SME sector in Australia. Once again, as in our own SME surveys, cash-flow is king. 90% of SME owners said they faced cash-flow related issues.  That said, the non-bank sector, including Fintechs need to do more to raise awareness of the solutions they offer.

SME business confidence is on the rise finds small business owners forecasting revenue to improve during the first half of 2018.

There appears to be a splitting of the pack in SME fortunes, with a greater number of previously “unchanged” growth SMEs moving into positive or negative growth.

For most SMEs cash flow has improved compared to 12 months ago, however one in 10 say they are worse off now. The number of SMEs reporting significantly better cash flow (27%) and better cash flow (42%) will hopefully act as a major driver of new capital expenditure and business investment demand.

Despite this reported rise in cash flow, nine out of 10 SMEs say they had cash flow issues in 2017 and nine out of 10 say these issues impacted on revenue. On average, small businesses say that better cash flow would have increased their 2017 revenue by 5-10%.

For SMEs with plans to invest in expansion over the next 6 months, 24% of them report they will fund that growth by borrowing from their main relationship bank – continuing a downward trend, and well short of the high of 38% who nominated this option to fund growth in the first round of the Index in September 2014.

21.7% of SMEs say they plan to use non-bank lenders to fund upcoming growth (with 90.8% planning to use their own funds). Non-bank lending intentions have trended upwards since the first Index, closing the gap between bank and non-bank lending intentions. Despite these intentions, more than 91% of SMEs responded in H1 2018 that in the previous 12 months they had not accessed any non-bank lending options to provide working capital for their business.

So while SMEs seem unsatisfied with traditional banks, they are not yet fully accessing opportunities available to them in the non-banking sector.

Results show that growth SMEs are five times more likely to use alternative lending options than declining growth SMEs, with debtor finance the most popular option. The growth potential for the non-bank lending sector is significant, given that 48% of SMEs who didn’t use non-bank lending in 2017 are considering it for 2018.

With SME owners revealing a solid reliance on personal credit cards to give their business the working capital required for day to day operations, those with better business solutions must find a way to reach these small business people.

Businesses implementing appropriate working capital solutions to get on top of cash flow impediments are well placed to realise their growth ambitions.