| Finally, some sanity on the economy Speech by Reserve Bank Deputy governor - Reserve Bank Deputy Governor Ric Battellino has delivered a speech entitled “An Update on Household Finances.”
- Battellino says that household finances and the economy “remain in good shape.” The Deputy Governor is confident that Australia can sidestep recessions in other parts of the globe and has downplayed fears of lower house prices by highlighting the shortage of dwellings in Australia.
What does it all mean? - We are heartened that the Reserve Bank has put some sanity back into the debate on the economy. The only complaint is that it has taken so long to set the record straight about how our economy is placed, especially in relation to household finances and the outlook for house prices.
- Importantly the Reserve Bank has sought to put recent developments like falling share prices and the pressure on household finances in perspective. Household balance sheets were in strong shape before the recent falls in share prices, so the declines that have occurred are from a position of strength.
- The Deputy Governor has sought to highlight the key differences between the US and Australian housing markets to refute claims that sharp falls in Australian house prices lie ahead. In Australia there is a shortage of dwellings, a marked contrast with the oversupply in the US.
- The Reserve Bank has provided some balance into the economic debate, something that has been sadly lacking in recent times. Clearly the views of the more gloomy commentators should have been challenged. The facts and figures provided by the Reserve Bank are freely available but unfortunately they have not had the same degree of exposure.
- The Deputy Governor has even tried to warn investors that they could miss out on above-average returns by being too risk averse. Its extraordinary that the Reserve Bank has to point out the longer-term benefits of investing in shares. Investors may ignore other commentators but they need to have good reasons to ignore sage advice from the central bank.
- We have been making the same points as the Reserve Bank Deputy Governor but without much success. Hopefully his comments will attract wider attention.
Some details from the speech - Household income growth over the past five years: “Real disposable income of the household sector grew on average by 6.1 per cent per year, resulting in a cumulative increase over the five years of more than 30 per cent. One has to go back more than 30 years to find a bigger increase over a five-year period.”
- Disposable incomes: “Put another way, over the past five years, the amount of money that Australian households had left over to spend, after paying taxes and interest on all their loans, grew in real terms at the fastest rate in over thirty years.”
- International perspective: “This growth in household incomes in Australia greatly exceeded that in any other developed economy.”
- Interest rates: “there is still a big task ahead to bring inflation down and this could limit room for manoeuvre on monetary policy.”
- Can Australia avoid recession?: “That is certainly what we are aiming for, and there is nothing in the data to date to suggest that we are off track.”
- Asia links: “One of the factors that helped keep Australia from following the developed economies into recession in 2001 was our increasing links to Asia, and China in particular. These links have strengthened further since 2001, with China now Australia’s largest trading partner.”
- Sharemarket: “While the sharp fall in share prices since late last year is confronting, the thing that needs to be kept in mind is that it was preceded by four years of extremely strong returns. As such, even after this year’s fall, anybody who has held shares over the past five years would still have earned 8 per cent a year on average.”
- Returns on shares: “The one-year forward earnings yield on Australian shares has risen to 11 per cent, well above the long-run average. This is a very attractive yield. When the yield has risen to these levels in the past, the return on shares over the subsequent 10 years has almost always been well above average.”
- Housing market: “In contrast to the US, there is an undersupply of housing. The overhang of unsold houses in the US has created downward pressure on house prices as builders and developers have been forced to sell. This is absent in Australia. Rather, the shortage of housing here means that there are buyers waiting for better circumstances – e.g. lower interest rates or rising incomes – to facilitate their entry to the market. This latent underlying demand for housing is a factor that will support the market.”
Source Craig James, Chief Equities Economist, CommSec |
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