Support package gains shape as GDP turning point swamped

The good news is our economy was performing better than had been thought in the lead-up to the bushfires and coronavirus. Via The Conversation.

Updated figures in Wednesday’s national accounts show the economy grew 0.6% in the three months to September, rather than the 0.4% previously reported, and a healthier-than-expected 0.5% in the three months to December.

Combined, these figures pushed annual economic growth up above 2% to 2.2% for the first time in a year in which it had been below 2% for the longest period since the global financial crisis.

Annual GDP growth

Through-the-year economic growth by quarter. Source: ABS 5206.0

Not to put too fine a point on it, it looks as if we were actually experiencing the the “gentle turning point” repeatedly promised by Reserve Bank Governor Philip Lowe.

As Lowe put it during the second half of last year:

After having been through a soft patch, a gentle turning point has been reached. While we are not expecting a return to strong economic growth in the near term, we are expecting growth to pick up.

The figures show the economy began (gently) picking up after the Reserve Bank began cutting rates in June. Counting this week’s latest interest rate cut, it has cut four times.

But the coronavirus and the bushfires have consigned the turning point to history.

Negative growth now possible

Not for a minute does Treasurer Josh Frydenberg believe the economy continued to improve this quarter, the March quarter.

Reminded that the support package promised by the prime minister will come too late for the three months to March, and reminded that many businesses haren’t been able to trade much, Frydenberg was asked to assess the risk the economy might now be going backwards, a state of affairs that if it continued long enough would be a recession.

He replied that the Treasury believes the bushfires alone will shave 0.2 points from growth in the March quarter. Added to that will be the risk from the spread of the coronavirus, which he believes will be “substantial”.

Tonight (Wednesday) Frydenberg and Treasury officials will take part in a phone hookup with other members of the International Monetary Fund to discuss developments including interest rate cuts in both Australia and the United States.

Treasury update on Thursday

The Treasury will finalise its estimate of the impact of the coronavirus on March-quarter GDP later in the evening and report it to a Senate estimates hearing beginning at 9am Thursday.

It means we will know the likely impact at about the same time as the treasurer.

To support retirees hurt by four near-consecutive rate cuts, the treasurer is considering cutting the deeming rate – the rate investments are deemed to have earned for the purposes of the pension income test. It’ll be the second deeming rate cut in the space of a year and will make it easier for retirees earning very little to remain on the pension.

The focus of the support package will business investment, which slid an unexpected 1.1% in the final three months of the year and 3.4% over the course of the year in defiance of budget forecasts it would climb.

Standard of living slipping

Although not ruling out support for householders, Frydenberg said mortgage holders had done well out of the past four rate cuts. Households with A$400,000 mortgages could soon be paying $3,000 less per year than they had in June.

Living standards, as measured by the Reserve Bank’s preferred measure, real net national disposable income per capita, went backwards in the December quarter, slipping 1.3%. Over the year, it climbed just 1.2%.

Household spending recovered somewhat, climbing 0.4% in real terms in the December quarter after inching ahead only 0.1% in the September quarter.

Throughout the year to December, real household spending grew 1.2% at a time when Australia’s population grew 1.5%. This means the consumption of goods and services per person went backwards.

Government spending provided substantial support. Over the year to December public spending on infrastructure grew 4.1% in real terms.

Deputy Prime Minister Michael McCormack said on Wednesday he would try and boost that by asking state and local governments to bring forward whatever projects they could, to start work in the next three to six months.

Recurrent government spending grew 5%.

Author: Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

Rate Cuts Don’t Cure Viruses

As expected the RBA cut the cash rate to 0.5% “the Board took this decision to support the economy as it responds to the global coronavirus outbreak”.

RBA Cuts, As Expected

All the major banks passed on the cut in full (thanks to severe political pressure), though gritted teeth. The profit pressure at the banks just went up a notch, on our modelling, a potential fall of more than 3%, though for some regionals perhaps double that. Players like Suncorp also passed on the cut.

The Government has said there will be a targetted package to assist businesses soon, and before the May budget. The savings deeming rate is now completely out of wack with even the very best deposit rates available, so pensioners, those on Government support and welfare are being hit by the gap. The deeming rate for singles is currently 3.0% for assets over $51,200 and 1.0% for those under that threshold. One way the Government is “balancing” the budget

Overnight the FED cut, in an expected “unexpected” drop of 50 basis points. This was the first time the Fed had cut by more than 25 basis points since 2008 and the reduction marks a stark shift for Powell and his colleagues. They had previously projected no change in rates during 2020, remaining on the sidelines during the election year, after lowering their benchmark three times in 2019. They of course rejected any political influence despite Trump’s consistent pressure to drop rates.

Its become very clear that central bankers are worried not only about the economic impact of COVID-19 but also the losses in the stock market.

The Fed said the coronavirus outbreak had disrupted economies in many countries and these measures will weigh on activity for some time. The magnitude and persistence of the impact is uncertain but the risks to their outlook changed enough to justify a move to support the economy. He added that there will be more action by each G7 nation along with the possibility of formal coordination. In other words, more easing is on the way from other central banks including the Fed if the sell-off in stocks deepens and the global slowdown worsens. This was aimed to restore confidence in the market, it did not.

The OECD indicated that economic growth could fall to as low as 1.5% for this year. The Fed’s decision could trigger a wave of easing from other central banks around the world although those in the euro-area and Japan have less scope to follow with rates already in negative territory.

The G7’s issued a statement that was to the point:

We, G7 Finance Ministers and Central Bank Governors, are closely monitoring the spread of the coronavirus disease 2019 (COVID-19) and its impact on markets and economic conditions.

Given the potential impacts of COVID-19 on global growth, we reaffirm our commitment to use all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks.  Alongside strengthening efforts to expand health services, G7 finance ministers are ready to take actions, including fiscal measures where appropriate, to aid in the response to the virus and support the economy during this phase.  G7 central banks will continue to fulfill their mandates, thus supporting price stability and economic growth while maintaining the resilience of the financial system.

We welcome that the International Monetary Fund, the World Bank, and other international financial institutions stand ready to help member countries address the human tragedy and economic challenge posed by COVID-19 through the use of their available instruments to the fullest extent possible.

But the point is, no rate cut, or government stimulus can cure the virus, which continues to spread with person to person transmission on the rise.

The latest WHO update says eight new Member States (Andorra, Jordan, Latvia, Morocco, Portugal, Saudi Arabia, Senegal, and Tunisia) reported cases of COVID-19 in the past 24 hours. Globally 90,870 cases have been confirmed (1,922 new), with China 80,304 confirmed (130 new) and 2,946 deaths (31 new). Outside of China 10,566 cases are confirmed (1,792 new) in 72 countries (8 new) with 166 deaths (38 new).

The flow on effects in terms of reduced commerce is significant, with more businesses unable to source raw materials or distribute good. Across transport and tourism, and education the impacts are immediate, but other sectors are following. Hence the expectation of slowing growth.

The question becomes, at what point do businesses cease to trade, or pay their employees, and to what extent will households also hunker down (many were already).

The US markets reacted badly to the FED’s move, with the Dow down close to 3%.

The ASX was also down in early trading.

The supply side consequences of the virus, could well flow on the credit markets, and in this case lower interest rates – other than as a confidence signal will not help.

Central bank tools are not going to cure the virus, and lower rates and more QE liquidity might well make the situation worse. Fiscal responses can provide a little more support, perhaps, though Governments seem reluctant to play that card hard.

We are in uncharted territory, and I do not think Central Banks can save us this time.

RBA Cuts, As Expected

At its meeting today, the Board decided to lower the cash rate by 25 basis points to 0.50 per cent. The Board took this decision to support the economy as it responds to the global coronavirus outbreak.

We suspect some banks will have difficulty in passing that cut through to mortgage holders, given the lower bounds problem. Westpac has however as first mover.

And the RBA only has one shot in the locker before QE starts.

The coronavirus has clouded the near-term outlook for the global economy and means that global growth in the first half of 2020 will be lower than earlier expected. Prior to the outbreak, there were signs that the slowdown in the global economy that started in 2018 was coming to an end. It is too early to tell how persistent the effects of the coronavirus will be and at what point the global economy will return to an improving path. Policy measures have been announced in several countries, including China, which will help support growth. Inflation remains low almost everywhere and unemployment rates are at multi-decade lows in many countries.

Long-term government bond yields have fallen to record lows in many countries, including Australia. The Australian dollar has also depreciated further recently and is at its lowest level for many years. In most economies, including the United States, there is an expectation of further monetary stimulus over coming months. Financial markets have been volatile as market participants assess the risks associated with the coronavirus. Australia’s financial markets are operating effectively and the Bank will ensure that the Australian financial system has sufficient liquidity.

The coronavirus outbreak overseas is having a significant effect on the Australian economy at present, particularly in the education and travel sectors. The uncertainty that it is creating is also likely to affect domestic spending. As a result, GDP growth in the March quarter is likely to be noticeably weaker than earlier expected. Given the evolving situation, it is difficult to predict how large and long-lasting the effect will be. Once the coronavirus is contained, the Australian economy is expected to return to an improving trend. This outlook is supported by the low level of interest rates, high levels of spending on infrastructure, the lower exchange rate, a positive outlook for the resources sector and expected recoveries in residential construction and household consumption. The Australian Government has also indicated that it will assist areas of the economy most affected by the coronavirus.

The unemployment rate increased in January to 5.3 per cent and has been around 5¼ per cent since April last year. Wages growth remains subdued and is not expected to pick up for some time. A gradual lift in wages growth would be a welcome development and is needed for inflation to be sustainably within the 2–3 per cent target range.

There are further signs of a pick-up in established housing markets, with prices rising in most markets, in some cases quite strongly. Mortgage loan commitments have also picked up, although demand for credit by investors remains subdued. Mortgage rates are at record lows and there is strong competition for borrowers of high credit quality. Credit conditions for small and medium-sized businesses remain tight.

The global outbreak of the coronavirus is expected to delay progress in Australia towards full employment and the inflation target. The Board therefore judged that it was appropriate to ease monetary policy further to provide additional support to employment and economic activity. It will continue to monitor developments closely and to assess the implications of the coronavirus for the economy. The Board is prepared to ease monetary policy further to support the Australian

Dwelling Approvals Moderate in January

The number of dwellings approved rose 0.5 per cent in January, in trend terms, according to data released by the Australian Bureau of Statistics (ABS) today.

The data is weaker than many was expecting, but we suspect that’s a direct impact of slowing of high-rise approvals, especially in Victoria, and perhaps the bushfires. The one-offs we saw at the end of last year, were exactly that.

ABS Director of Construction Statistics, Daniel Rossi, said: “The rise was driven by private sector houses, which rose 0.8 per cent, in trend terms.

“Meanwhile, private sector dwellings excluding houses fell 0.1 per cent. A significant fall in the number of apartments approved in January has offset the strength recorded in late 2019.”

Across the states and territories, dwelling approvals rose in Australian Capital Territory (7.3 per cent), Victoria (2.8 per cent) and Northern Territory (2.7 per cent). Falls were recorded in Tasmania (3.7 per cent), South Australia (3.4 per cent), Western Australia (2.0 per cent), New South Wales (0.8 per cent) and Queensland (0.7 per cent), in trend terms.

Approvals for private sector houses increased in Victoria (2.6 per cent), Western Australia (2.0 per cent), Queensland (0.6 per cent) and South Australia (0.4 per cent). Private house approvals in New South Wales fell 2.1 per cent, in trend terms.

The seasonally adjusted estimate for total dwellings approved fell 15.3 per cent in January, driven by a 35.5 per cent decrease in private dwellings excluding houses. This was largely due to weakness in approvals for apartments (which is volatile from month-to-month), especially in Victoria.

The value of total building approved rose 0.3 per cent in January, in trend terms, after falling for six months. The value of residential building rose 0.1 per cent, while non-residential building increased 0.4 per cent.

Staring Down The Barrel of a Technical Recession

This week marks a new phase in the coronavirus crisis with the case count outside China accelerating sharply. Via The Conversation.

China’s containment strategy bought global health authorities time to prepare, but failed to confine the outbreak to North-East Asia.

In the past week both President Trump and Prime Minister Morrison have prepared citizens for a rise in the onshore case count in recognition of the likelihood the virus will spread to most of the world.

Because it isn’t possible to shut down the global trade and transport system without causing a global recession, their strategy has shifted from containment to preparation.

It’ll be important to manage panic

Critical to the process is managing panic. If consumers around the world substantially reduce their spending either as a precautionary measure or in response to public health fears, the impact on businesses will be substantial.

The key economic challenge will be to stop a vicious cycle of weaker spending and job losses taking hold. Targeted government spending can help businesses at risk, although some will use it as an excuse to reset their cost base and scale down in an economic environment that was challenging even before the coronavirus.

Global share markets have fallen 10% in a week as this new phase has begun to unfold, adding to uncertainty and fear.

Rate cuts are all but certain

Countries that have the capacity to cut interest rates will do it. In the US, markets are expecting a cut at or before the next meeting of the US Fed on March 17.

In Australia, markets are expecting a cut of 0.25 points at the Reserve Bank’s board meeting on Tuesday. There is some talk of a double cut, of 0.50 points, which would bring the Reserve Bank cash rate down from 0.75% to 0.25%.

The cuts would be aimed at shoring up confidence in the economy and financial markets as much as anything else. Global rates are already low enough to provide economic stimulus. It will be up to politicians to provide the targeted measures that will be needed to help keep businesses afloat and people in jobs.

We’re facing a Chinese recession

The trade and travel restrictions in place in and around China will have major ramifications. Estimates of the impact of the containment policies on Chinese growth in the first quarter of the year range from minus 2% to minus 10%, enough to obliterate growth in the world’s fastest-growing big economy.

A shocking Chinese purchasing managers’ index reading on the weekend showed a fall to a new low not reached during the global financial crisis.

Few countries are as exposed to Chinese purchasing as Australia.

Australia gets GDP figures on Wednesday for the final three months of 2019. These are likely to show the economy grew by less than 0.5% in the quarter.

Most of the impact of the bushfires and the initial impact of the coronavirus will show up in the data for the first quarter of this year. Many analysts have pencilled in a negative number.

And possibly an Australian recession

It will leave Australia exposed to what is known as a technical recession – two consecutive quarters of negative economic growth, in the three months to March and the three months to June.

This possibility, Australia’s first recession in 29 years, will depend on how we react to the emergence of coronavirus onshore.

The initial reaction might paradoxically support measured economic growth as people stockpile supplies. The next phase would be a reduction in spending as people avoid leaving their homes. As we are seeing in China, and more recently in Korea and Italy, shopping districts can become ghost towns.

It would be akin to a nationwide rise in saving, which drains consumer spending and business activity. Beyond efforts to maintain perspective and keep calm, little can be done to prevent people from willingly choosing to remain at home.

We’ll need targeted, clever, government support

It is in this phase that government policy actions will be critical. A mild technical recession caused by an external shock would be undesirable but need not be a disaster for the community if the employment ramifications can be minimised.

Government efforts need to be directed at stopping a negative shock evolving into a self-reinforcing spiral of declining spending and lower employment.

Lower interest rates will be of very little use to start with. Governments will need to target support to those parts of the economy most under stress with the greatest risk of job losses.

The challenge will be to identify those businesses at the greatest risk of insolvency.

The Reserve Bank board will need to follow the lead of the US Federal Reserve and at least issue a soothing statement to financial markets that it is ready to act if needed.

If it is too early to gauge the impact of this new phase of contagion of the coronavirus, it is really too early for rate cuts. And there is a risk that a rate cut this week might generate more panic and amplify the effects of any consumer and business panic already upon us.

At most, the bank can support the government. It is our leaders who will bear the biggest responsibility for steering us through what’s to come.

Author: Warren Hogan, Industry Professor, University of Technology Sydney

KiwiSaver Divests and Disarms

KiwiSaver default funds have been banned from investing in fossil fuels and certain weapons under new legislation. Via InvestorDaily.

Default funds will be banned from investing in fossil fuel production to negate the risk of New Zealanders’ retirement savings being invested in stranded assets as the world moves to reduce emissions. 

“No New Zealander should have to worry about whether their retirement savings are causing the climate crisis,” said Climate Change Minister James Shaw. 

“That’s why our government is moving default KiwiSaver funds away from fossil fuels, putting people and the planet first.”

KiwiSaver members are allocated to a default provider if they don’t actively choose a KiwiSaver fund when commencing their employment. Around 690,000 people remain in a default fund, with approximately 400,000 of those having not made an active choice to stay there. 

The New Zealand government also believes that the switch to more responsible investment will also improve member outcomes. 

“In 2017, the $47 billion NZ Superannuation Fund adopted a climate change investment strategy that resulted in it removing more than $3 billion worth of stocks that exceed thresholds for either emissions intensity or fossil fuel reserves, without negatively affecting performance,” said Commerce and Consumer Affairs Minister Kris Faafoi.

“So we know that moving away from investments in fossil fuels doesn’t have to mean lower returns.”

The changes will also prevent default fund providers from investing in weapons like cluster munitions and anti-personnel landmines (which are subject to the Convention on Cluster Munitions and the Ottawa Treaty respectively). While default fund providers were already moving away from investment in weapons, the changes now enshrine that requirement in default fund settings.

No “V-Shaped” Recovery Here – With Tarric Brooker

Another chat with Journalist Tarric Brooker covering finance and politics. Tarric uses the handle @AvidCommentator on Twitter.

We discuss the latest economic and political dynamics as the RBA considers a rate cut tomorrow, and central banks around the world seek to support their financial markets. How might this play out?

Don’t Panic – Central Bankers Will Save Us!

We look at the latest reactions to recent market falls, ahead of the RBA’ decision tomorrow.

As the BBC reported too:

Share prices in Asia have risen after Japan’s central bank promised to help protect markets from the impact of the coronavirus.

It comes after data showed Chinese factory activity fell in February at the fastest rate on record.

On Friday the US Federal Reserve made a similar pledge to stop more big falls on the world’s financial markets.

Last week concerns about the outbreak wiped more than $5 trillion from global stocks.

In a rare emergency statement, Bank of Japan (BOJ) Governor Haruhiko Kuroda said the central bank would take necessary steps to stabilise financial markets: “Overseas and domestic financial markets continue to make unstable movements due to heightening uncertainty over the impact on the economy from the spread of the coronavirus.”

“The BOJ will monitor developments carefully, and strive to stabilise markets and offer sufficient liquidity via market operations and asset purchases,” he added.

The language used in the statement suggested the central bank is ready to make full use of its existing tools to inject funds into the market, before considering what other steps it may take.

It follows a similar unscheduled announcement by the chairman of the US Federal Reserve. On Friday Jerome Powell said the central bank is watching developments closely for risks to the US economy and promised to take action if necessary.

Data released on Saturday showed that China’s official Purchasing Managers’ Index contracted in February at the fastest rate on record. The fall, which was even worse than slump seen during the 2008 global financial crisis, highlights the outbreak’s huge impact on the world’s second-largest economy.

Over the weekend senior officials in President Donald Trump’s administration also tried to soothe concerns about the risk of recession, highlighting the US economy’s underlying strength.

US Vice President Mike Pence, who is leading the administration’s response to the coronavirus, said that the stock market “will come back”, adding that “the fundamentals of this economy are strong”.

Private Health Insurance Is Sick

The ACCC just released their 21st report into the Private Health Insurance Sector, which analyses key competition and consumer developments and trends in the private health insurance industry to 30th June 2019 that may have affected consumers’ health cover and out-of-pocket expenses. This report also continues the ACCC’s focus on adequate private health insurer
communications to their consumers, including on detrimental policy changes, as well as potential emerging issues in the use of consumer data.

And in summary the system is unwell. Private health insurance premiums rise faster than income despite growing exclusions. For the first time, the majority of hospital treatment policies held by Australians now contain exclusions with more than 57 per cent of policies containing exclusions, up from about 44 per cent in the previous year. This chimes with our household surveys which shows more younger people are jettisoning their policies, or not signing up in the first place. This is a wicked problem, as more sick people as a total proportion are within the system, meaning that costs are becoming more concentrated.

Plus, the ACCC notes that consumer data collected by private health insurers and other businesses, for example through wellbeing apps and rewards schemes, can be used for a number of purposes such as targeted marketing, including from third parties.

Key industry data used and relied upon by the ACCC includes industry statistics and data collected by the Australian Prudential Regulation Authority (APRA) and private health insurance complaints data from the Private Health Insurance Ombudsman (PHIO).

As at 30 June 2019, 13.6 million Australians, or 53.6 per cent of the population, had some form of private health insurance. This represents a membership reduction of 0.6 per cent from June 2018 (54.2 per cent). The Australian population grew by 396 722, or almost 1.6 per cent, during this period. The decline is sharpest among younger age groups.

The five largest health insurers have a combined market share of almost 79.5 per cent and contributed to almost 77.5 per cent of total health fund benefits paid in 2018–1915, with Bupa and Medibank contributing 26.7 per cent and 25 per cent respectively.

The average premium increase of 4.8 per cent per year over this period has been higher than the average annual growth in the wage price index (2.1 per cent) and the consumer price index (1.6 per cent) over the same period. While the rate of the average yearly premium increases has been decreasing each year over the past five years, and was 3.25 per cent in 2018–19, the average industry premium change for 2020, to take effect on 1 April 2020, will be 2.92 per cent – still well above wages growth.

From June 2018 to June 2019, the proportion of hospital policies held with exclusions increased by almost 14 per cent. For the first time, the majority of policies held now have exclusions.

The number of exclusionary policies held increased by over 650 000 from June 2018 to September 2018, with an equivalent reduction in non-exclusionary policies during the same period. APRA’s statistics did not indicate the reasons for this rise in the number of exclusionary policies during the reporting period. However, analysis by Silvester and others has suggested that less expensive exclusionary policies may appeal both to existing policyholders whose policies have become unaffordable, as well as to young people buying health insurance to avoid LHC loading and the
Medicare levy surcharge.

While most in-hospital services are delivered with no gap payments required from patients, this rate has varied in recent years, from a low of less than 85 per cent of services not requiring a gap payment in September 2015, to almost 89 per cent in March 2018, before falling again to under 87 per cent in June 2019.

From June 2018 to June 2019, the average gap expense incurred by a consumer for hospital treatment was $314.51, an increase of 1.9 per cent from the previous year, as shown in table 8. Average gap payments for extras treatment increased by almost 4 per cent to $49.20 over the same period.

A YouGov survey from late 2019 found that, after the cost of premiums and a perceived lack of value for money, out-of-pocket costs were a leading reason given by respondents for no longer holding private health insurance.

Several health insurers offer rewards schemes for their members, some of which involve the use of fitness tracking apps and devices to record activities such as steps and sleep. Some of these apps operate in conjunction with companies other than health insurers. For example, the health insurers MO Health and GMHBA are both partnered with the life insurer AIA Australia Limited, and use the AIA Vitality program issued by AIA.

HCF has also entered into a partnership with Flybuys where new HCF members can collect Flybuys points based on their annual health cover
premiums. Qantas, which offers health insurance issued by NIB, also offers frequent flyer points for members who download the Qantas Wellbeing app and undertake certain activities. Its Qantas Wellbeing Program Terms and Conditions state that members must link a tracking device to record their physical activity, and that as members, they consent to Qantas: “collecting, using and disclosing any personal information including health and Wellbeing information submitted by the Member through joining or use of the Wellbeing Program or collected by Qantas through the Tracking Device or the Qantas Wellbeing App”.

Although Australians can receive benefits from rewards and discounts offered by health insurers and other organisations that collect consumer data, the ACCC is concerned that few consumers are fully informed of, fully understand, or can effectively control, the scope of data collected when they sign up for, or use, such services.

While the community rating system for private health insurance in Australia prohibits insurers from charging different private health insurance premiums to individual consumers based on health and other
factors, the ACCC notes that the consumer data collected by wellbeing apps and rewards schemes could be used for a number of other purposes, including for targeted marketing (including from third parties), and potentially to create insights that could be shared with or sold to third parties.

The system will continue to be under pressure – and we think the model is frankly broken.