Inflation Confidence
MSQ Capital’s Managing Director Paul Miron explores the world’s hottest and most controversial topic.
3 min
OPINION
The Government — particularly Josh Frydenberg — is breathing a sigh of relief as the most recent positive economic data demonstrates a strong Australian economy.
Inflation is now both locally and internationally the hottest and most controversial economic topic for the year. Put simply, it’s because the entire global economic recovery hinges on the ability of central banks to keep interest rates low for an extended period in order to give the global economy the push it needs towards a full recovery.
The most recent Australian inflation figures have come in lower than anticipated at 1.1% per annum. This re-affirms the RBA’s carefully articulated argument about maintaining low interest rates until the economy reaches a level of full employment. Unemployment is now down to 5.6%, consumer spending is racing back to pre-Covid-19 levels, and trade figures are strong due to high iron ore prices — all of which contributed to a $30b windfall in the current budget figures.
It seems the ‘Achilles’ heel’ to all this good news is inflation uncertainty.
The topic of inflation has not been part of our vocabulary since the era when Paul Keating was treasurer in the 1980s and Australia experienced “the recession we had to have”.
An analogy that best describes the importance of inflation is that like watering a plant, both too little or too much water may kill it. And so it is the right balance of low constant inflation increases business profits over the long term — increasing business productivity. Such strategy helps to reduce unemployment, increases tax revenue and naturally erodes the real value of debt.
Too much inflation can have the opposite impact. The most powerful tool left to control high levels of inflation is the RBA’s use of contractionary monetary policy (increasing interest rates). However, this is not without risk — done prematurely, it will have a negative price impact on assets such as shares and property, further stunting economic growth and possibly spiralling the economy into a recession.
Governments and central banks will need to put on a brave face and maintain confidence in their ability to steer the global economies through these tricky times. A loss of confidence from consumers and businesses is enough of a catalyst for a self-fulfilling prophecy for inflation issues to emerge unfavourably.
This is, in itself, a very thought-provoking concept as inflation is not purely driven by economic data and activity. It is also driven by the future expectation of businesses and workers, which drive businesses to make decisions such as increasing prices on goods and services and employees hitting up bosses for a pay rise.
Covid-19 has completely skewed economic data
Worth contemplating when attempting to interpret economic data is the “base effect”. Covid-19 forced the economy to a complete standstill, with all the major economic indicators falling off a cliff. Once the economy has been rebooted from a virtual standstill, the economic indicators are all being overly exacerbated during the economic recovery. As an example, we have had two quarters of GDP growth at 3%, however, our economy is still nowhere near the same levels as it was pre-Covid-19 despite the data implying otherwise.
Be prepared that the next inflation figure will be an absolute whopper, as it will reflect people returning to work and spending money on normal items such as childcare, entertainment and transport.
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Paul Miron has more than 20 years experience in banking and commercial finance. After rising to senior positions for various Big Four banks, he started his own financial services business in 2004.
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2 min
China’s economic recovery isn’t gaining the momentum money managers are awaiting.
Data from China Beige Book show that the economic green shoots glimpsed in August didn’t sprout further in September. Job growth and consumer spending faltered, while orders for exports came in at the lowest level since March, according to a monthly flash survey of more than 1,300 companies the independent research firm released Thursday evening.
Consumers’ initial revenge spending after Covid restrictions eased could be waning, the results indicate, with the biggest pullbacks in food and luxury items. While travel remains a bright spot ahead of the country’s Mid-Autumn Festival, hospitality firms and chain restaurants saw a sharp decline in sales, according to the survey.
And although policy makers have shown their willingness to stabilise the property market, the data showed another month of slower sales and lower prices in both the residential and commercial sectors.
Even more troubling are the continued problems at Evergrande Group, which has scuttled a plan to restructure itself, raising the risk of a liquidation that could further destabilise the property market and hit confidence about the economy. The embattled developer said it was notified that the company’s chairman Hui Ka Yan, who is under police watch, is suspected of committing criminal offences.
Nicole Kornitzer, who manages the $750 million Buffalo International Fund (ticker: BUIIX), worries about a “recession of expectations” as confidence continues to take a hit, discouraging people and businesses from spending. Kornitzer has only a fraction of the fund’s assets in China at the moment.
Before allocating more to China, Kornitzer said, she needs to see at least a couple quarters of improvement in spending, with consumption broadening beyond travel and dining out. Signs of stabilisation in the housing market would be encouraging as well, she said.
She isn’t alone in her concern about spending. Vivian Lin Thurston, manager for William Blair’s emerging markets and China strategies, said confidence among both consumers and small- and medium-enterprises is still suffering.
“Everyone is still out and about but they don’t buy as much or buy lower-priced goods so retail sales aren’t recovering as strongly and lower-income consumers are still under pressure because their employment and income aren’t back to pre-COVID levels,” said Thurston, who just returned from a visit to China.
“A lot of small- and medium- enterprises are struggling to stay afloat and are definitely taking a wait-and-see approach on whether they can expand. A lot went out of business during Covid and aren’t back yet. So far the stimulus measures have been anemic.”
Beijing needs to do more, especially to stabilise the property sector, Thurston said. The view on the ground is that more help could come in the fourth quarter—or once the Federal Reserve is done raising rates.
The fact that the Fed is raising rates while Beijing is cutting them is already putting pressure on the renminbi. If policy makers in China wait until the Fed is done, that would alleviate one source of pressure before their fiscal stimulus adds its own.
Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’
Americans now think they need at least $1.25 million for retirement, a 20% increase from a year ago, according to a survey by Northwestern Mutual
