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By Hayley James, Managing Director
The major banks in Australia have reported strong profits in a climate of constrained demand. They have also held dividends at previous levels. Economists are in general agreement that the economy will be low growth into 2016, but will grow.
Inflation is tepid following release of the consumer price index which rose 0.5 per cent for the September quarter for an annual rate of 1.50 per cent which is below the Reserve Bank’s target band of 2 to 3 percent for a year. The Australian dollar reacted to this news dropping three quarters of a cent to the US dollar in anticipation that the Reserve Bank of Australia will cut its official cash rate by 25 basis points to a record low of 1.75%. This contrasts with the major banks policy of out of cycle rate rises on variable mortgages in order to meet regulatory demands to bolster capital.
Economic growth has remained below par this year and unemployment has been lower than expected – all this despite a housing boom and 20 % fall in the value of the Australian dollar verses its major trading partners since April 2013.
Pricing power remains weak reflecting constrained growth in retail sales and cautious consumer confidence. The disinflationary effects of modest global growth are evident in the general weakness of commodity prices over recent years.
Housing demand from owner occupiers will continue particularly on the eastern seaboard where infrastructure is being laid out. The housing market remains under supplied and because of this, large downward corrections are not being anticipated by developers. Office and commercial markets in Sydney and Melbourne are performing strongly after coming off a period of weak demand which is expected to continue beyond the end of the decade.
For Sydney and Melbourne business and financial services are the mainstays of office and talent demand. At this point in time, employment in the finance sector has remained flat comparative to previous quarters, however business services employment has started
What to look for in the short to medium term? Mike Smith’s comment following the profit statement of the ANZ is that he is comfortable where the Australian economy sits at the moment. Watch the inflationary moves as low wages and a low inflation rate will have an impact on how consumers spend their dollar. In this case it will be negative however let’s watch with interest the post-Christmas retail sales results to get a gauge on consumer spending versus this time last year.
Signs are emerging that China will struggle with growth. Interest rate moves with the Federal Reserve in the US will also be important because it will have a strong flow through effect on the Australian dollar. A continuing fall with the Australian dollar will be positive for Australian manufacturers and farmers. All in all, there are reasons to be positive in Australia but caution remains as the world economy remains flat.