What was once expected to be a temporary stock market correction – due to both overvaluation and imminent US interest rate hikes – appears at risk of turning into something more enduring if the Australian economy fails to lift itself from the mire sometime soon.
This past week’s June quarter GDP results suggested the economy remains in a low growth funk, and there seems no end in sight. That’s hardly great news for corporate profits and the stock market.
Only a fortuitous spurt higher in usually quite weak government spending saved us from recording a negative GDP result last quarter – which would have led to even more confidence sapping headlines over how the economy is “one foot into recession.”
As it was, the economy eked out growth of a measly 0.2%. Within that, general government spending on goods and services surged 2.2% – contributing an outsized 0.4 crucial percentage points to growth, compared to usual contribution of only 0.1 to 0.2 pp.
Despite suspicions to the contrary, I doubt the Government deliberately planned to boost spending in this way – it was just a quirk over how our national statistician records the numbers.
Elsewhere there was not much else to trumpet. Consumer spending put in another sub-par performance, growing at only a 2% annualised rate. The great hope of a wealth led decline in household saving – which would boost consumer spending – is being undone by very weak underlying household income growth, due to only moderate employment growth and soft wage growth. Government also can’t afford to handover tax cuts in ways we’ve become accustomed to in recent years.
Households are saving a bit less to be sure, but that’s coming out of a barely moving income base.
The business investment outlook is even worse. Engineering construction continued to decline last quarter, as did investment in plant and equipment. Last’s week’s June quarter capital expenditure survey, moreover, still point to a recession-like decline in nominal investment spending of around 20 per cent this financial year. The mining investment outlook remains as week as ever, while the great hope of lift in non-mining investment has still failed to materialise. Indeed, on the latest number, both manufacturing and service sector investment is also expected to decline this financial year.
Exports meanwhile gave back most of the surge evident in the March quarter – which in turn was reflected a backlog of resource shipments held up by earlier bad weather. The outlook for mining export volumes remains solid, though in terms of income for the nation this is being offset by greatly depressed export prices. One light on the horizon, however, is gathering strength in non-mining exports such as tourism and education – due to the rapidly depreciating Australian dollar. Indeed, service export volumes are up 7.2% on year-ago levels. That better than nothing, but hardly enough to lift the economy out of its current mire.
Note even housing construction slipped back by 1.1% last quarter, which is consistent with broad topping out in building approvals over recent months. There may be a little more growth in dwelling investment still in the pipeline, but there is a risk this could fizzle out by early 2016 given that building approvals are already around past historical peak and may not be able to push much higher. The fact that there’s been a crackdown on investor lending – right around the country – will not help.
Again this background, it hard to see an upturn in the corporate earnings outlook anytime soon. As seen in the chart below, forward earnings for companies in the S&P/ASX 200 index have meandered sideways for some time, and this performance seems likely to continue.
The one hope for our market is that PE valuations might continue to rise due to still low interest rates. As seen in the chart below, relative to interest rate the market is still on the cheap side of fair-value – but this picture could change if bonds yield start to rise due to rate hikes by the US Federal Reserve.
All up, I would not count on a return to a strong upturn in the market or the economy anytime soon. It is likely to remain a stock pickers market – but even the corporate stars may find their share prices challenged by a lacklustre market.
