THE BIG PICTURE: Our hidden growth picture

The Organisation of Economic Co-Operation and Development (OECD) has just produced its latest outlook report. The question is whether we should care about its views. The OECD has been termed the “rich nations” club as it includes most of Europe and North America and Australia. But it has lost relevance over time with the rise of emerging and developing nations such as China, India and other Asian countries. In fact emerging and developing nations are now bigger than advanced nations for the first time.

Certainly it’s always good to get another view on the world. But sometimes these organisations want to be the story, not report on the main story, being the global economy. The OECD has come up with downbeat views, but once you dig through the detail, the outlook is far from dire. In addition, the ordinary public doesn’t get free access to OECD reports, unlike organisations such as the International Monetary Fund.

The OECD tips growth of around 1.4% for member countries in 2013 after a similar result in 2012 and tips 2.3% growth in 2014. Compare this with the IMFs recent forecast for the global economy in 2013 of 3.6% – above the long-term average of 3.4%.

The OECD tips growth for Australia of 3.0% in 2013 after expected growth of 3.7% in 2012. So it’s clear that Australia has far less in common with other so-called rich nations in the OECD.

The week ahead

We’re into the final straight of 2012. And as is usual, the year is set to go out with a bang, not a whimper. Each new season is ushered in with a barrage of economic data. And summer is no different. So brace for the summer tsunami – in the coming week there are no fewer than a dozen key economic or financial events in Australia. In the US, there is a lighter offering of data with Friday’s non-farm payrolls (employment) data attracting the most interest.

In Australia the week kicks off on Monday with a mini hurricane of data. The Performance of Manufacturing data is released together with the TD Securities inflation gauge, ANZ job ads series, RP Data-Rismark home value index, retail trade and the Bureau of Statistics Business Indicators publication which includes profits, sales and inventories.

It is hard to isolate the most instructive data from the list but retail trade, home prices and inflation are the ones which we would single out. Overall, the data is likely to prove uninspiring. Retail trade and home prices both probably edged 0.1% higher while inflationary pressures were probably well contained over November.

On Tuesday the Reserve Bank Board meets for the final time in 2012 to decide interest rate settings. Is there a stand-out favourite in the ‘cut/no cut’ lottery? The short answer is no. The RBA Board probably should have cut rates last month, but the decision was by no means clear cut. We think the Board should cut, but tend to believe it will hold off until 2013 given the raft of domestic and global uncertainties.

Also on Tuesday government finance figures are released together with building approvals and the broad Balance of Payments. We expect that the volatile building approvals series eased 3.0% in October after September’s out-sized 7.8% gain.

On Wednesday the spotlight shines solidly on the “National Accounts” – a publication that includes estimates of economic growth, productivity and household savings. We expect that the economy chalked up modest growth of 0.7% in the September quarter, modestly below “normal” growth of 0.8%.

Also released on Wednesday is the Performance of Services index while Reserve Bank Deputy Governor Philip Lowe delivers a speech to the Australian Business Economists annual conference dinner – effectively the economists Christmas Party.

And on Thursday the November employment data is released. CommSec expects that employment rose by 10,000 in the month while the unemployment rate is likely to be around 5.4-5.5%. Jobs are being created, just not at a fast enough rate to chip away at the jobless rate. And on Friday the October trade data is released alongside the Performance of Construction index.

In the US, the highlights of the week are the ISM manufacturing index on Monday and the ISM services index on Wednesday, alongside the ADP employment report. On Friday the November job report (non-farm payrolls) is released. Most of the data is expected to be on the soft side with economic activity affected by Hurricane Sandy which hit the US North-east in late October.

Economists tip a 105,000 lift in jobs in November after a solid 171,000 increase in October. The jobless rate is expected to remain unchanged at 7.9%. Interestingly, weaker readings will probably be ignored – explained away by the super storm. But a stronger-than-expected reading is more likely to be embraced as a sign of economic recovery.

The other data of note in the US over the week includes auto sales and construction spending (Monday); productivity and factory orders (Wednesday); Challenger job layoffs (Thursday); and consumer sentiment (Friday).

Sharemarket, interest rates, currencies and commodities

Despite a number of setbacks, basically it has been a good year for Aussie shares. The sharemarket bottomed out on December 20 last year, then trended higher to peak on May 2 before the first setback arrived. Total returns on shares (as judged by the All Ordinaries Accumulation index) fell almost 10% through to June 4 before recommencing its upward trend. The next peak for shares was on October 19 before the second correction took hold. Returns fell almost 5% through to November 16 before the rally recommenced again.

Over 2013 so far, total returns on Aussie shares have lifted by 13.8% – and if the gains hold – returns will retrace the 11.4% loss over 2011. Interestingly it will also mean that returns on shares over the past year will average just 1% a year. In other words shares have broadly marked time since the GFC took hold in 2008. By contrast shares outperformed over the previous five years with gains averaging 21.5% a year.

Put the two periods together and share returns would average around 11% a year – almost precisely the same average over the longer 25-year period back to 1988.

Certainly it is important to include dividends in any assessment of the performance of shares over time. Over the past five years the dividend yield has averaged 4.45% – the highest yield for an equivalent period in 18 years.

Craig James is cheif economist at CommSec.


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