The Point

Tim Hext: Australian business remains resilient as we enter spring

Business managers believe the economy remains on a decent footing and has even slightly picked up from July.

That’s the finding from NAB’s latest monthly business survey.

“The soft landing looks on track, at least for now,” says Pendal’s head of bond strategies, Tim Hext

“Businesses are not confident about the future, but still see conditions as favourable and even improving.”

But investors should separate the nominal economy from the real economy (adjusting for inflation), says Tim.

“Nominally, higher population growth has seen some expansion in the economy and increasing demand for goods and services.

“On the real side, inflation and higher rates has meant individuals are tightening their belts.

“Business knows this, and when the population growth falls back next year the nominal economy will also start feeling this.

“For now, though our models show rate hikes are still more likely than cuts, though the RBA looks happy to sit out the next few months.”

The good news? We’re avoiding recession. The bad news? Living standards are going backwards

This week the ABS released our latest national accounts – quarterly estimates of economic flows such as GDP, consumption, investment, income and saving – for the June quarter.

What did we learn?

“First, the good news,” says Pendal head of bond strategies Tim Hext. “We are avoiding a recession.

“GDP is 2.1% higher than a year ago, though slowing. It’s been 0.4% for two quarters now and will likely end the year near 1.2% – slightly higher than the RBA forecast of 0.9%.”

The bad news?

“We’re clearly in a per-capita recession,” says Tim. That means economic growth is not keeping pace with population growth.

Which means the average person is going backwards in their standard of living.

“Our population grew by 0.7% in Q2, the economy only 0.4%. GDP per capita is now 0.3% lower than a year ago and 0.6% lower than six months ago.”

Why is this happening and what’s next?

Inflation back below 5pc – but getting to 2-3pc remains a challenge

Annual inflation fell below 5 per cent in July and looks on track to hit 4 per cent or lower by the end of the year as 2022’s higher numbers drop out.

That reduces any urgency around further rate hikes – particularly since the fixed-rate cliff is now peaking, which effectively increases rates independent of the RBA.

However, the battle to get inflation back into the 2-3% band will still be a challenge next year and rate cuts seem a distance away, says our head of government bond strategies Tim Hext.

When Dr Michele Bullock takes over as RBA governor on September 18 she will be keen to establish her inflation credentials – so any move to a dovish outlook is unlikely, says Tim.

“For now, rates remain range-bound – as do risk markets,” he says.

Amy Xie Patrick: The market’s getting excited about China again, but it may be premature

THE latest message from China’s top decision-making body caused a stir this week when investors noted softer language on property.

For the first time since 2016, President Xi Jinping’s signature slogan that “houses are for living, not for speculation” was missing from a note that followed a Politburo meeting.

That got the market excited about the potential for a meaningful China stimulus push via the property sector.

But the market is getting ahead of itself, says Pendal’s head of income strategies Amy Xi Patrick.

“The line has likely been dropped because it’s simply no longer needed. Buyers are no longer speculating. They are actively selling in an attempt to exit the property game altogether.”

Amy believes there is no silver bullet for the Chinese economy.

The case for bonds as rate hikes push Australia towards recession

Recession talk increased in Australia this week after the RBA’s decision to lift rates for the 12th time in just over a year.

Pendal’s Anna Hong agrees the chance of a recession in Australia is increasing with rate hikes.

That bolsters the case for Australian government bonds, cash and high-grade investment credit, argues Anna, an assistant portfolio manager in Pendal’s Income and Fixed Income team.

Australia is one of only a handful of countries to record a budget surplus this financial year and – not withstanding the threat of recession – remains in good economic shape, she says.

“From an economic perspective, even if things go wrong, the government is in a good position to support the Australian economy.

“Australian banks are world-leading in capital strength. As a result, assets within Australian shores are safer than almost any other part of the world.”

Tim Hext: Inflation remains stubbornly high — but not as high as you may think

The April monthly inflation data from the ABS showed an annual rise of 6.8%, versus an expected 6.4%.

On the surface that should worry the RBA and markets – and increase the chance of another rate hike in June.

But under the hood, the May number looks closer to 5.5%, which means the RBA should be able to hang on till August and reassess then.

How can we tell? The monthly numbers are published as year-on-year outcomes, and you need to back-solve to gain a sense of the monthly pace, says Pendal’s head of bond strategies Tim Hext.

There’s no underlying inflation data yet, and only half the items in the basket are updated every month at the moment.

Pandemic and energy shock subsidies also need to be taken into account, he says.

“The outlook for inflation here and in the US should be mildly friendly over the next few months,” believes Tim.