Economic Update October 2018

Within this month’s update, we share with you a snapshot of economic occurrences both nationally and from around the globe.

Australia economic data beat expectations
– Australian growth and labour force data strong
– US confidence at 18-year high
– Trump trade tariffs diluted

The Big Picture

For a change, major Australia economic data releases looked strong – at least on the face of it. Our economic growth measure came in at +3.4% for the year which is above trend by anyone’s opinion. The quarterly figure was +0.9% against an expected +0.7%.

The problem with this surge in growth is that it has been fuelled by a dangerous fall in the household savings ratio. In the last quarter, this ratio was only 1% compared with double figures after the onset of the GFC. It would be alarming indeed if the savings ratio stayed at such a low level and so future economic growth will no longer benefit from falling savings. The 3.4% figure looks like being the peak for quite some time.

Our labour force data was also strong. The unemployment rate stayed at 5.3% but 44,000 new jobs were created and 34,000 those were for full-time positions. These data are undeniably good.
Westpac’s consumer sentiment index did fall 3% points – possibly because yet another change in prime minister. The Reserve Bank (RBA) kept rates on hold but that did not stop three big banks raising home loan rates. Since banks get much of their funding from overseas, the RBA rate alone does not control bank lending rates. But a rate hike for home owners slows things down whether it comes directly from the RBA or from the knock-on effects of overseas rate increases.

Unlike in Australia, US consumer confidence just reached an 18-year high and quarter two’s economic growth figure was confirmed at 4.2%. The US economy is very strong with another 200,000 jobs being created over the month and the unemployment rate is at a very low 3.9%.

The strength of the US economy allowed the Federal Reserve (Fed) to hike its rate as expected by all. The new range is 2% to 2.25% and 2.5% is widely considered to be a neutral rate. The Fed removed the word ‘accommodative’ from its press release. The big questions are whether they will hike again in December and how many more hikes will come in 2019. 12 of the 16 Fed members think they will hike again in December and the consensus is for three more hikes in 2019. That would mean monetary tightening in the second half of 2019.

The market is less sure of future hikes. It thinks there will be only one or two next year. If the Fed goes ahead with its thinking, markets could slow down late in 2019.

Nobel Laureate, Robert Shiller, a particularly practically-orientated Yale professor was interviewed on Bloomberg TV. He stated quite firmly that no one can predict turning points in markets with any reasonable degree of accuracy. Although the S&P 500 hit all-time highs again in September he argued that the market could go higher by as much as 50% – based on a comparison with statistics during the dotcom boom at the turn of the millennium.

Trump broadened his imposition of new tariffs on China imports as expected. However, he set the rate at 10% rather than the expected 25%. However, if a deal isn’t reached beforehand, the tariff automatically jumps to 25% on January 1st. China of course retaliated but the escalation of the tariff war so far seems milder than many expected.

North Korea noticeably did not display missiles in its 70th anniversary parade in September. The next day, their leader wrote to Trump requesting further talks. The tensions at the beginning of the year have largely dissipated.

Asset Classes

Australian Equities

Our ASX 200 had a down month ( 1.8%) in September after five successive months of capital gains. The resources sectors each had a particularly strong month but Financials and Healthcare really brought the index down.

When dividends, but not franking credits, are included, the ASX 200 was down 1.2% on the month but up +5.9% on the year after the end of three quarters.

Foreign Equities

The US’ S&P 500 has now enjoyed six successive months of capital gains and its bull run – the longest in recorded history – looks set to continue.

In spite of all of the negative sentiment about tariff wars, the S&P 500 index is up +9.0% on the year to date which is well ahead of the world index at 4.1%.

London’s FTSE was up 1% on the month despite the gloom about getting a Brexit deal in time.

Bonds and Interest Rates

The US Fed put rates up by 0.25% points at the September meeting. The Fed funds rate range of 2% to 2.25% is now close to what is widely thought of as a neutral rate of 2.5%. At a lower rate, the Fed is said to be accommodative and above that it is tightening.

With the Fed “dot plots” presented at the press conference showing one more hike this year and three next, the Fed is clearly thinking the economy could grow too strongly on the fiscal stimulus created by the Trump administration.

Other Assets

Prices of oil, copper and iron ore grew strongly over September. The price of gold slipped a fraction.

Regional Analysis


The strong economic growth for quarter two released in September was better than expected. However, the household savings ratio is back close to zero – which is where it was at the start of the GFC. Households then over-corrected their savings strategies for the first few years but in the last couple of years, households have gone back to the bad old ways of not saving enough.

This savings behaviour, together with strong immigration, means that our annual growth of 3.4% is an overstatement of what could be reasonably considered to be sustainable in the medium term.

The jobs data were good with 44,000 new jobs being created in August. However, consumer sentiment fell by 3% points. The RBA was on hold.


China has had import tariffs applied to a wide range of goods imported by the US. So far, neither the US nor China economies seem to be adversely affected.

China’s official Purchasing Manager’s Index (PMI) for manufacturing did miss expectations at 50.8 but the services PM rose to 54.9 from 54.2 in the previous month. It is a natural consequence of a maturing economy that there is a gradual switch from manufacturing to services. Both the manufacturing and services reads were well above the 50 that divides improving growth rates from declining growth rates.


The US consumer confidence read came in at 138 which is well above a neutral read of 100. The latest number is the best in 18 years taking us back to the dotcom boom.

Trump is positioning his party for the November mid-term elections. By taking on China toe-to-toe, he is gaining support from both sides of politics. If a deal is struck with China, it will be a big boost to markets.


Italy is taking on the EU by increasing its fiscal deficit programme. It is far from yet being an important issue but, with two populist parties now in power, it might be a sign of worse to come.

Rest of the World

North Korea is rapidly becoming a problem solved in the nuclear debate. While few applauded the way in which Trump went about this situation, the results so far are extremely encouraging