Reading the economic signposts – The Australian Economy
Putting together an informed view on the Australian economy can be challenging, both for experts and for investors given the minefield of information available. There are some signposts though that can point you in the right direction, help decipher the truth from the noise and help inform you of market trends and economic impacts.
Gross domestic product (GDP) – This is the broadest indicator of the performance of an economy. GDP measures the value and volume of all goods and services produced over a specific period of time within a country. Generally it is reported as a percentage, and is referred to as economic growth. It is a good indicator to judge the pace of growth and also the momentum of growth. Currently Australia’s economic growth is 3.7% which is faster than average but is expected to slow over the year ahead.
Generally economists and financial market participants use other indicators to achieve a more timely read on the economy as GDP data is released 10 weeks after the end of a quarter. Other indicators that are used are described below in detail, and others would include consumer confidence, retail sales, building approvals and commodity prices.
Jobs data – the overall performance of the economy drives demand for labour and this is measured through employment and the unemployment rate. Unemployment rates tend to move higher when economic growth is weaker. Unemployment also impacts on consumer confidence and consumer spending.
Interest rates – The actions of the Reserve Bank of Australia (RBA) through movements in the official cash rate provide a signal of their view on the economy and the outlook. When the RBA is reducing interest rates, generally the economy is slower, inflation is contained and unemployment is rising. By cutting interest rates, the RBA is providing the incentive for the economy to grow. It can also be a reflection of weaker global economic growth. Generally when the official cash rate falls, interest rates on savings accounts also drop as do lending rates for borrowers.
When the RBA is lifting the official cash rate, economic growth is strong, unemployment is falling and inflation pressures are beginning to build. A higher interest rate is designed to crimp economic activity, by encouraging more savings through banks offering higher interest rates on savings accounts and reducing demand for loans as lending rates are now higher
In recent times the RBA has been lowering the official cash rate as inflation remains contained, the global economy has slowed and uncertainty has appeared about the outlook for the Australian economy. Primarily the RBA is trying to encourage the non-mining economy to grow, to help takeover from the mining investment boom when it peaks in 2013.
Consumer Price Index (CPI) – the CPI index is a measure of inflation. It measures the average change over time of a selection of goods and services purchased by average household consumers. Generally inflation rises when the economy is strong, while inflation is contained when the economy is growing at a slower pace. Currently inflation is contained, helped by a strong Australian dollar and weaker consumer demand.
Examining inflation data is also important for determining the future path of interest rates in the economy.
Aussie dollar – The Australian dollar historically has been a good barometer for the overall performance of the Australian economy and is closely linked to commodity prices and interest rates.
The Australian dollar has been elevated against most foreign currencies for several years now. This has been driven by a number of factors including historically high commodity prices due to strong demand from China, the Australian economy outperforming international peers and higher interest rates in Australia compared to elsewhere
The impact of a high Australian dollar is that our exports are more expensive while imports are cheaper. Currently sectors such as manufacturing and tourism have been disadvantaged but consumers have benefited from cheaper imports. When the dollar is low, our exporters benefit but imports are more expensive.
What does it mean?
There are many indicators of the economic health of Australia. These indicators impact on the sharemarket and other asset classes in various ways. Generally you can assume that if the economy is performing better, the sharemarkets improve and bond yields and interest rates rise. While if the economy is slowing, the potential for company profits falls, sharemarkets can decline and interest rates and bond yields can move lower.
While economic indicators are inevitable and can impact your portfolio in both a positive and negative way, it is important to remember that your financial adviser would have worked with you to create a strategy that is in line with your personal circumstances and risk profile. It would be wise to review your portfolio periodically with your financial adviser so that you continue making the most of your investments.
Speak to us today if you would like to understand more about how this information might impact your financial situation.
This document has been prepared by Count Financial Limited ABN 19 001 974 625, AFSL 227232, (Count) a wholly-owned, non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124. ‘Count’ and Count Wealth Accountants® are trading names of Count. Count advisers are authorised representatives of Count. Count is a Professional Partner of the Financial Planning Association of Australia Limited. Information in this document is based on current regulatory requirements and laws, which may be subject to change. While care has been taken in the preparation of this document, no liability is accepted by Count, its related entities, agents and employees for any loss arising from reliance on this document. This document contains general advice. It does not take account of your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.