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Tuesday, March 31, 2009

Population growth hits 40 year highs

Population statistics
Australia is experiencing the biggest migration boom in history with 235,800 migrants arriving in the year to September 2008. Australia’s overall population grew by 1.84 per cent over the year – the fastest rate of growth in almost 40 years.
Not only is Australia experiencing a migration boom but also a baby boom. In the year to September 295,200 babies were born – the most since quarterly records began 27 years ago.
Victoria’s population is growing at the fastest rate in nearly 40 years, while Western Australia’s population is growing at the fastest pace in 20 years. NSW noted the largest quarterly increase in population on record.
What does it all mean?
Australia’s population is growing at the fastest rate in almost 40 years and much of the boost has been provided by migrants. The remarkable lift in Australia’s population has significant consequences for the economy. The faster rate of population growth means that the economy can grow at a faster pace.
More people in Australia means greater demands for houses, roads, schools, hospitals and a raft of retail goods, and as such is providing much needed stimulus in trying times for the global economy. It can’t be stressed enough that Australia’s migrant boom is a big deal. Not just in boosting economic growth in the short-term but also in addressing the longer-term implications of Australia’s ageing population
However all the extra people also put greater demands on our economy. Extra productive capacity is being added, but it carries with it some extra inflationary risks. It’s not surprising that states have to undertake huge infrastructure programs given our fast-growing population. And our population is set to grow at a similarly fast rate over the coming year.
The strength and growth in population continues to put further upward pressure on the demand for housing. While the supply of housing remains far short of demand we are seeing that the housing sector is slowly starting to build more homes. The rental market is the tightest in 19 years and can’t get much tighter. The strength in rental yields and a more uncertain outlook for the share market is likely to see more investment in housing over the coming months.
Certainly it’s not just China’s demand for resources that is propelling the Australian economy forward. The increase in skilled migration helps meet the demand for labour by Australia’s employers. While an increase in migrants sees further demand for housing, general retail spending and even the purchase of more costly white goods. In short, the inflow of skilled migrants creates a virtuous cycle of higher employment, spending and investment, while keeping a lid on inflationary pressures.
Australia’s current baby boom is certainly a reflection of the more buoyant economic times in 2007 and early 2008. There is no doubt that starting a family is a decision that has a lot more to it than just how well the economy is travelling, however economic considerations do play a key role. The deterioration of the global economic over the last year and expected rise in unemployment in the coming year will likely see a flattening out of the birth rate – similar to what was noticed around the time of the 1991 recession.
While states like Western Australia, Queensland and Victoria are leading the population gains, there is also good news for NSW. Population growth in NSW is now the strongest in seven years, boosting the outlook for Australia’s largest state economy.
What do the figures show?
A record 235,800 people migrated to Australia over the year to September 2008. Each day an additional 646 people called Australia home.
Over the year to September, 68,388 migrants settled in NSW, followed by Victoria (62,672), Queensland (46,488), Western Australia (38,418), South Australia (15,280), ACT (2,155), Tasmania (1,619), and Northern Territory (838).
Australia’s population expanded by a record 389,300 people over the year to September to 21,542,500 people. Overall, Australia’s population grew by 1.8 per cent over the year to September 2008 – the strongest gain in records going back nearly 40 years (1970). Population growth had been strong in the 1950’s -60’s due to the post war migration and baby boom.
There were 295,200 babies born in the year to September 2008 – the largest number of births since quarterly records began 27 years ago.
Population growth increased in all states except the Northern Territory. Over the past year population growth was fastest in Western Australia (2.94 per cent), followed by Queensland (2.49 per cent), Northern Territory (2.19 per cent), Victoria (1.85 per cent) ACT (1.44 per cent), NSW (1.33 per cent), South Australia (1.13 per cent), and Tasmania (0.93 per cent).
Victoria’s population is growing at the fastest rate since the 1969 while Western Australia’s population is growing at the fastest pace in nearly 20 years (December 1988).
NSW noted the largest quarterly increase in popoulation on record with 32,919 people call NSW home in the September quarter. NSW population is growing at the fastest pace in over seven years with a growth rate of 1.33 per cent.
What is the importance of the economic data?
Demographic Statistics are issued by the Bureau of Statistics each quarter. The figures includes estimates of births, deaths, in-bound and out-bound migration movements and estimates of population change by State.
What are the implications for interest rates and investors?
In softer economic times, governments are tempted to cut migration as we have seen recently but the federal government needs to be mindful of such a negative knee-jerk decision. Extensive liaison with the business community will be required to ensure that demands for skilled staff in certain industries can be adequately met internally.
The rising number of migrants coming to Australia will add to the demand for homes in 2009. Building material companies, developers, retailers and banks have potential to gain from the lift in housing activity.
A whole raft of companies benefit from fast population growth. The building block of retail spending is population, so the increase in births and migrant numbers is likely to help keep retailers such as Woolworths, Harvey Norman and David Jones seeing continued growth.
The record number of births will add to the demand for childcare places over the next five years.
Source Craig James, Chief Equities Economist, CommSec

Friday, March 20, 2009

More rate cuts… the only question is when

RBA Board minutes
· The Reserve Bank Board debated the possibility of further rate cuts at the March meeting before deciding to keep rate on hold. The board believes generational low interest rates and fiscal stimulus is having an expansionary effect on the Australian economy, however it is too early to judge the extent of the expansion.
· The Board has indicated that the speed and scale of the deterioration in the global economy will result in an unavoidably weak level of domestic activity in the short term.
· CommSec expects the Reserve Bank to cut interest rates at the April meeting and reassess the situation in subsequent months following more timely economic data.
What does it all mean?
· It is pretty clear from the minutes of the latest Reserve Bank Board meeting that the Board debated further rate cuts before deciding to keep rates on hold. The Reserve Bank Board has indicated that the Australian economy has been front loaded with more than enough ammunition late last year to combat the current downturn, but the speed and scale of the deterioration in the global economy will no doubt see near term domestic activity unavoidably weak.
· A quiet confidence is perceived in the Board minutes with members keeping rates on hold at the March meeting despite noting that the December quarter GDP number would show a slight contraction. The resilience of the Australian economy, strength of the financial sector and the fact that the “monetary policy transmission process” still worked, would help to see an improvement in economic activity over the longer term.
· The Board clearly believed that with interest rates at 45 years lows and significant fiscal stimulus currently been undertaken, it was having an expansionary effect on the Australian economy. However gauging the size and extent of recovery was the difficult part. As a result the Reserve Bank decided the more prudent course was to keep rates on hold.
· The Reserve Bank Board certainly hasn’t closed the door to further rate cuts. But neither is it flagging that another significant rate cut is on the agenda. A raft of positives were noted across sectors from retail spending, government stimulus, double digit growth in business investment and the pick up in the housing activity. For the Reserve Bank it becomes a matter of timing the rate cuts to ensure maximum “bang for the buck” and also having enough ammunition left to feel comfortable about future outlook.
· The Reserve Bank noted that policy interest rates had been reduced to almost zero across several advanced economies and quantitative easing had become the alternative stimulus policy. Buying commercial debt, shares and agency paper in the hope of increasing money supply and in turn economic activity were having mixed results over the last few months. Quantitative easing will no doubt be an avenue that the Board will want to avoid considering the longer term ramifications.
· Future rate cuts will all depend on the state of financial markets and global economic at the time of each Reserve Bank Board meeting. At some point the Reserve Bank is likely to call a low for interest rates with money markets expecting it to be around 2 -2.5 per cent.
· CommSec is factoring in the possibility of another rate cut of 50/75 basis points over the next few months. At this stage the Reserve Bank looks likely to cut rates once again in April and reassess the situation in subsequent months.
What do the figures show?
Minutes from the February Reserve Bank Board meeting
Key Comments:
· “Members were informed that, with the national accounts for the December quarter scheduled for release the day after the meeting, the partial data available to date indicated a small fall in output in the quarter… Recent indicators suggested that economic activity had remained subdued in the early part of the March quarter.”
· “Business conditions, while also having fallen, were fluctuating around levels similar to those seen during the slowdown early in the current decade. Slowing business activity had led to further declines in capacity utilisation, which had fallen noticeably from the peak levels reached a year or so earlier..”
· “..retail spending had increased sharply in December, after a run of weak readings in previous months. This produced a rise in spending in inflation-adjusted terms in the December quarter, following three quarters in which sales had been relatively flat. Data released during the meeting showed that the higher level of December sales was maintained in January, with sales rising by a further 0.2 per cent.”
· “Members noted that real household disposable income had been boosted towards the end of 2008 by lower lending interest rates, lower petrol prices and government transfer payments. Members recognised that these effects were not evenly spread across households and that for households which are interest receivers there had been a loss of income from that source. But for the household sector as a whole, the net effect had been a significant addition to disposable income..”
· “Declines in house prices in the past few months had mainly been in the more expensive suburbs, with prices in other suburbs appearing to level out. In a sign of increased demand for housing, patterns of housing finance indicated an increase in housing loan approvals of about 10 per cent over the past few months, partly spurred by the increased incentives for first home buyers to enter the market.”
· “Further signs of an increased level of activity in the secondary housing market were significant rises in auction clearance rates in both Sydney and Melbourne in February, and a component of the Westpac-Melbourne Institute consumer sentiment survey indicated that current conditions were conducive to buying a dwelling.
· “Looking at government finances, the Australian Government’s fiscal package announced in February would provide significant stimulus to the economy over the next two years.”
· “Conditions in the labour market had continued to soften, with no growth in monthly trend employment in January. The unemployment rate to date had risen relatively gradually from its low of 4 per cent, though members noted that significant deterioration was forecast”
What is the importance of the economic data?
· The Reserve Bank releases minutes of its monthly Board meeting a fortnight after the event. The minutes give a guide to Reserve Bank thinking on interest rate settings.
What are the implications for interest rates and investors?
· The global economy has shown no key signs of bottoming out. And the recent weakness of Chinese economic data is yet a further sign that domestic rate cuts remain on the agenda. The expected rise in unemployment and paring back of domestic growth in the short term will keep the Reserve Bank deliberating on when to deliver further rate cuts.
· The flow of more timely economic data in the next few weeks will give the Reserve Bank a better gauge on the current domestic situation. CommSec expects another reduction of 50/75 basis points to be delivered at the April Reserve Bank Board meeting.

Source Craig James, Chief Equities Economist, CommSec

Friday, March 6, 2009

Mark of confidence: RBA leaves rates on hold

Reserve Bank Board meeting
The Reserve Bank has left the cash rate unchanged at 3.25 per cent. It was the first time in six meetings that the Reserve Bank had not cut rates.
The decision to leave rates unchanged highlights the Reserve Bank’s confidence in Australian economic fundamentals.
We still believe that the Reserve Bank is pausing, rather than ending, its rate-cutting cycle. CommSec factors in another 50-75 basis point rate cut in April 2009, taking the cash rate down to a low of 2.50-2.75 per cent.
What does it all mean?
Some may call this a courageous decision, some will see this as a sign of confidence in the Australian economy. But at some point the Reserve Bank had to pause in its record-breaking efforts to stimulate the economy. The Reserve Bank is confident that it has done enough to boost growth, especially with the added firepower of government spending and a weaker Australian dollar.
The Reserve Bank has made it clear that it doesn’t want to win just the battle but rather the war. By keeping its powder dry today the Reserve Bank has plenty of ammunition to use if there is another, more dangerous downward leg to the global slowdown. A good soldier never uses all the ammunition available. And as events of the past 48 hours have shown us, the global economy is a long way from full health.
If today’s move had to be summed up in one word, it is confidence. The Reserve Bank has confidence in Australia’s economic fundamentals and banking system. And by leaving rates unchanged the Reserve Bank is hoping to engender confidence. The biggest risk we face here in Australia is that of talking ourselves into recession.
Unlike many investors and economists, the Reserve Bank has been paying attention to all the economic information, not just the gloomy readings. Over the past week figures have shown strong retail spending, record construction work, record business investment and a sharp rise in home sales. It is clear that rate cuts are working to lift the Australian economy and shake off the gloom from abroad.
Not all Australians will support the decision to leave rates on hold. But the Reserve Bank has an impressive track record, steering the economy to 17 uninterrupted years of growth and it deserves our trust and respect.
The Reserve Bank hasn’t closed the door to future rate cuts. The world is a scary place at present and further rate cuts may be necessary to insulate our economy. CommSec continues to pencil in a 50-75 basis point rate cut in April. The low-point for the cash rate is expected to be around 2.50-2.75 per cent.
The Reserve Bank Governor has warned that at some point interest rate cuts don’t have the same positive effect on the economy. Super-low interest rates of 2 per cent and below would indicate to many that the economy is in dreadful shape, prompting them to cut, rather than lift, their spending and investment.
Interest rate decision and past cycles
The Reserve Bank has left the cash rate at a 45-year low of 3.25 per cent. The rate cuts of 25 basis points(bp) in September, 100bp in October, 75 bp in November, 100bp in December and 100bp in February represent the most aggressive easing cycle ever undertaken.
The current cash rate of 3.25 per cent remains the lowest since February 1964 when the short term money market yield averaged 3.18 per cent.
Before the September rate cut there had been twelve rate hikes in the cycle extending back over five years (since May 2002), the last occurring on March 4. Over that period, rates lifted 3 percentage points to 7.25 per cent.
Just like 2000/01 there was a gap of six months between the last rate hike and first rate cut. In the 2001 rate cut cycle, rates were cut by 2 percentage points in the space of 11 months (to 4.25 per cent).
In the prior 1996/97 rate cut cycle, cash rates were cut 2.5 percentage points in 12 months, followed by another 25 basis point move just over 16 months later. The low point for interest rates was 4.75 per cent.
Comparing the two most recent statements
The statement from the February meeting is below together with the statement from today’s March 2009 meeting. Emphasis has been added to significant changes in wording in the recent statement.
MEDIA RELEASE
No: 2009-05Date: 3 March 2009Embargo: For Immediate Release
STATEMENT BY GLENN STEVENS, GOVERNORMONETARY POLICY
At its meeting today, the Board decided to leave the cash rate unchanged at 3.25 per cent.

Recent data confirm that the world economy has remained very weak following the sharp decline in demand that occurred late last year. The major industrial economies reported large contractions in output in the December quarter, as did a number of emerging market economies across Asia and eastern Europe. Many countries are likely to be experiencing further falls in output in the current quarter.

Conditions in global credit markets have improved since November, but sentiment remains fragile. Share prices have weakened and banking systems in several major countries are still under pressure, as authorities work towards a resolution of the balance-sheet problems. Significant macroeconomic policy stimulus is being put in place around the world, but it is too soon to see the effects of those measures.

In Australia, demand has not weakened as much as in other countries and, on the basis of currently available information, the Australian economy has not experienced the sort of large contraction seen elsewhere. The Australian financial system remains strong and the monetary policy transmission process is working to deliver large reductions in interest rates to end borrowers. Nonetheless, economic conditions are clearly weak, and given the speed and scale of the global economic deterioration and its effect on confidence, weak conditions are likely to continue in the near term. Inflation is likely to decline over time.

In response to that outlook, there has already been a major change in both monetary and fiscal policy. Market and mortgage rates are at very low levels by historical standards and business loan rates are below recent averages, reducing debt-servicing burdens considerably. Together with the substantial fiscal initiatives, the cumulative decline in interest rates will provide significant support to domestic demand over the period ahead. On this basis, notwithstanding evident economic weakness at present, the Board judged that the stance of monetary policy was appropriate for the moment. The Board will consider the position again at its next meeting.
Reaction: Sharemarket lifts; AUD rises, future rate cuts re-assessed
The All Ordinaries index initially eased from 3165 just ahead of the decision to 3142, before rebounding to 3177 in late afternoon trade.
The Australian dollar rose from near US63.40 cents to US64.08 cents in immediate reaction to the rate cut announcement before steadying near US63.90 cents.
The overnight indexed swap market is now pricing in a cash rate of 2.75-3.00 per cent over the next four months.
What are the implications for interest rates and investors?
We are right behind the Reserve Bank in its decision to leave rates on hold. CommSec hopes that analysts will now start to take a more balanced approach in assessing each piece of economic data.
Anyone that had been sitting on the sidelines, waiting for the opportunity to jump, will now start to get edgy. If rates have bottomed – or close to it – now is the time to be acting. It is possible that we will now see a wave of budding property owners and investors wading into the market.
Budding property owners no doubt fear that if they drag their heels then the stock of unsold homes will dry up and prices will soar.

Source Craig James, Chief Equities Economist