Hi,
Went to the lunch with Bill Evans yesterday and it was great. We were front and centre and I sat next to the State Manager and my wife sat next the National GM of Commercial. We also had the CEO of On The House at our table on the other side of the State GM who I said hello to at the end of the presentation. I felt quite small in vaulted company...
Bill's presentation was great. He is a very good public speaker and seemed to have his finger on the global pulse. I've tried to capture some of his key messages here:
Forecasts: the government and Westpac:
- Economic growth to be sub-trend slowing to 2.75% in 2013/14 as headwinds persist.
- Global outlook a risk.
- Housing recovery to be mild and business outlook uncertain suggesting risks skewed to the downside.
Housing outlook:
- The current recovery has been slow to form and despite a quickening in early 2013 is uneven across segments and states.
- We expect more of the same as price expectations show gains well-entrenched but 'consumer caution' to remain an ongoing constraint.
Australian Interest Rates:
- Our long held target of 2.75% was reached in May as the RBA rightly saw fir to use some of the 'scope' provided by low inflation.
- With our 2.75% target achieved we now choose to quantify the downside risks on rates.
- Expect a trough in early 2014 at an even 2%.
Australian Dollar:
- Lower interest rates will help bring fair value down but while QE persists so will AUD over valuation although we expect the gap to narrow from 8-10c now to around 5-6c in 2014.
Some additional mental notes I took:
Bill is predicting fixed rates will fall by another 15bp to bottom out around mid 2014. However, he said when the US stops printing rates will take off and turn sharply. He advocates locking now as when they turn they will turn quickly and why risk missing out when their only 15bp off their potential bottom at his best guess. And he's the only economist out there calling a 2% cash rate too so he could be wrong.
Sydney to lead the property market in the coming year. Sydney to benefit most from the current monetary settings. The stimulatory effect will most directly lift Sydney's particular business market and he expects Sydney property values to close the under-performance gap to the other major cities that its experienced through the recent cycle.
Brisbane next best placed but will be flat for another 12 months. Melbourne might rise slightly but then flat and has very little medium term potential for upside and will under-perform Sydney and Brisbane to a lesser degree.
The unemployment rate is set to peak in mid-2014 at around 6.25% nationally.
Underlying inflation to stay low despite carbon tax leaving a lot of scope to lower rates further.
Rental yields are close to current mortgage rates. Investors in Sydney are piling back into the market, but FHBs are absent. He believes that incentives targeted towards new construction are less appealing broadly and that states should revert to all encompassing FHB grants to kick the market off.
He believes the RBA raised rates in the last cycle prematurely to stop the residential market taking off because the mining sector was taking off and they couldn't afford a boom in both segments. He believes this time that mining is dying, maufacturing and services are dead and the RBA will continue to cut rates to kick off residential construction as inflation is persistently low and they need residential construction to fill the gap left by mining.
He also advocates big infrastructure spending by the federal government as they have a strong AAA credit rating and should do the heavy lifting. State credit ratings are weaker but federally they could do a lot if they were so inclined. Our government debt at 10% of GDP is low by any standard, compared with NZ at 25%, Canada at 30% and then the basket case economies like the UK, France and US all around 80% and up from there.
He said the next big risk in Europe is Spain. I can't remember the specifics but it involved the bond market and defaults etc. By then I was onto my third glass of red and finished a couple of beers...
Hope that gives some insight into his thoughts and a little bit to chew on for all the budding Somersoft economists out there.
Cheers,
Michael
