On the 18th of December 2013, the U.S. Federal Reserve finally announced it would begin to taper or wind down QE3 – an $85 billion a month shot in the arm to keep the economy afloat after the worst recession since the 1930s.
Starting in January 2014, the Fed will wind total purchases down a notch to $75 billion a month. Depending on how the economy reacts, the Fed will continue to cut in each meeting throughout the year. Fed chairman Ben Bernanke said “If we’re making progress in terms of inflation and continued job gains, then I imagine we’ll continue to do, probably at each meeting, a measured reduction” in purchases. However, if the economy slows, Bernanke says they will consider skipping a reduction in a meeting or two, or if the economy accelerates could taper a bit faster.
Reactions are mixed. Some believe the Fed will have difficulty removing the stimulus fast enough to prevent inflation, while many others believe the only reason there are signs of growth in the U.S. economy is due to the sheer size of QE3. Take it away, and the unsustainable, fragile economy will quickly falter.
Opinions also vary as to why the Fed has announced the taper. While some believe the U.S. economy is showing good progress. Others some warn QE3 has only served to create more asset bubbles – namely a stock and new housing bubble, but has done little to improve the broader economy and support job growth. And now the Fed needed to act decisively to prevent these bubbles getting much bigger.
The only thing for certain is after such a large and prolonged stimulus, the result to global stability of the tapering will be a wildcard this year – Anything could happen.
China Economic Growth Model “Unsustainable” – Deputy Finance Minister Wang Bao’an
The other global wildcard for 2014 is China and has far greater implications for Australia. Last year we raised the question if the second stage of the GFC would be made in China and if WMPs would replace CDOs as the buzz word in this crisis. (GFC2 – Will it be made in China? – June 30th 2013)
At the time, a credit freeze in China had caused the Shanghai Interbank Offered Rate (Shibor) – a measure of the cost of commercial banks to lend to each other, to surge. After a couple of days of abstaining, the People’s Bank of China (PBoC) was forced to intervene and inject liquidity into the market. Only two weeks prior, ratings agency Fitch warned China’s credit bubble was now unprecedented in modern world history.
In the days before Christmas, and not long after the Fed taper was announced, it was happening again with lending benchmark rates hitting the highest levels since the June crisis. Once again, the PBoC came to the rescue injecting 29 billion Yuan to provide short term relief. Minsheng Securities Macroeconomics analyst, Zhang Lei told the Global Times “The cash injection can only ease the problem in the short run, Banks will face tight liquidity until mid-2014, as an increasing number of financial instruments will be maturing in the first half of next year.”
The concern is a plethora of loans taken out by State owned Enterprises (SoEs) to fund public infrastructure and real estate investments, many empty or under utilised and with low returns – if at all. The projects are an attempt to keep economic growth chugging along, but at some stage the debt must be refinanced.
In an rare and unusual stand, China’s Deputy Finance Minister Wang Bao’an wrote an article in the latest issue of Qiushi, a bi-monthly political theory periodical of the Central Committee of the Communist Party of China saying China’s current economic growth model is “unsustainable.” He described the Chinese economy as “high input, high resource consumption, high pollution, high growth” with “low output, low efficiency, low profit, low tech”.
In a recent column for the Project Syndicate website, billionaire investor George Soros believes the biggest risk in the World Economy now is China – you can forget the USA. No doubt we will see more in this space as the year progresses.
Australia
Back home, trends are somewhat clearer barring any external shocks. The Australia Dollar is expected to continue falling this year resulting in broad price increases on imports. The RBA said it will be comfortable with 85 cents. One of the world’s largest investment firms, BlackRock, believes the dollar could fall to 80 cents this year (Aussie dollar headed for US80¢ with RBA to cut rates again, says BlackRock – SMH.) A crisis in China could push it below 80.
After an approximate 15 per cent fall since April, already we are starting to hear the odd whinge about petrol prices at $1.65 litre. Most Australian’s have taken the overpriced Australian dollar for granted without a second though – cheap petrol, cheap electronics, cheap apparel even cheap overseas holidays. The depreciating dollar is coming as a shock. It’s not so much of a case of prices are getting expensive, but a case that prices were abnormally cheap and are just returning to where they should have been had we not had a resource boom. In December, we quoted from Professor Ross Garnaut’s latest book – “No developed country has experienced as large a sustained appreciation in its real exchange rate as Australia has through the China resources boom,” “In turn, this means that no developed country has ever successfully worked through such a fall in the real exchange rate and associated contraction of incomes.”
The other shock will be income growth or rather the lack thereof. Treasury’s chief economist David Gruen told a conference in November last year, “Our estimates say that if we achieve productivity growth similar to its long run average, the next decade will see the slowest income growth in Australia for half a century by a lot.” This comes from an expected decline in Australia’s terms of trade and is consistent with views from the International Monetary Fund (IMF) and the Australian Productivity Commission. (Slowest living standards growth in ‘our lifetimes’ – SMH)
The Australian Bureau of Statistics (ABS) Wage Price Index for the September 2013 quarter reported an seasonally adjusted 0.5 per cent increase, the second lowest increase since the introduction of the Index in 1997. Over the year to September, wage growth was 2.7 per cent, the lowest annual rate since 2000 (Tech Wreck).
Late last year an Organisation for Economic Co-operation and Development (OECD) report (House prices, labour costs leave economy vulnerable: OECD – AFR) showed Australia had the largest appreciation in relative unit labour costs in the OECD effectively putting Australia at a competitive disadvantage to the world. This coupled with the high cost of living and constrained discretionary spending from Australia’s housing bubble (High housing costs make Australia’s economy uncompetitive – ABC) and household debt overhang is expected to see unemployment continue to accelerate this year.
All eyes will also be on the May budget after the Mid-Year Economic and Fiscal Outlook (MYEFO) showed a substantial deterioration in the domestic economy. During the boom years, Australia’s wealth was squandered on various tax relief’s. Cuts will now need to be made placing Australian households under even more pressure.
Finally, there seems little scope for double digit house price growth the experts are once again predicting (annual tradition around the holiday period). As per the Australian headline, House prices [are] at the mercy of the budget (outside of an external shock). In the article, Dr Andrew Wilson talks some sense, “Nothing will stop a housing market quicker than a declining business cycle and that’s certainly what we have the prospects for in NSW and Victoria,” “Rising unemployment will cause lower wage growth, which reduces the capacity of buyers to borrow.”
What are your predictions for 2014?
» Slowest living standards growth in ‘our lifetimes’ – The Sydney Morning Herald, 21st November 2013.
» Low wage growth, job fears hold inflation down – The Australian, 18th November 2013.
» Aussie dollar forecast to fall to 80 cents in 2014 – The ABC, 31st December 2013.
» U.S. and China: When the giants unwind Commentary: Withdrawal of stimulus could well cause a fresh crisis – Market Watch, 30th December 2013.
» Vice-minister calls for new economic growth model – China Daily, 3rd January 2014.
» China tries to deal with its mountain of debt – The Sydney Morning Herald, 30th December 2013.
» House price growth at mercy of budget – The Australian, 1st January 2014.
» China move calms credit concerns – The BBC, 24th December 2013.
Unfortunately, my prediction is that Australia will continue to be “lucky” throughout all of 2014.
I hope it does not stay lucky. We want to buy a house sick of renting we have saved a deposit but we are to scared to buy.
Nup. My guts say it’s all a ponzi and it’s about to become custard.
Australia is bad right, every one who didnt buy before the market went crazy, before the carbon tax, before 10% gst ontop of state and federal taxes when the gas bills were cheap SHOULD KNOW that.
Well i got the hell out of dodge!
I went to thailand. The LOS land of sin, or some like to call it the land of scams. Well its the land of free market capitalism for me.
The dont scam you every one is trying to sell you something, if you pay to much its your dumb luck for not negotiating properly.
I had to renew my police state ID booklet today at the australian embassy, it cost me over 10000 baht, my thai friends nearly fell over when the hear that.
I pay monthly 2000b rent, that is 63 dollars australian!!!
When you buy a phone here you hand over the money, and they hand over the phone, no police state involvment.
When you rent a house here you hand over the money they give you the keys [well that was my house any way].
When you buy gold, you hand over the money and they hand you the gold end of story. no govt anti money laudroudaosdhflaskjd fh;asdfh ;alsdk bullshit!!!
F__K u australia , so so so so much, f__k u australians even more
i just worry because the thais think govt is the answer to things too, the whole world is getting sicker
it will either end in run away interest rates or run away inflation one country after another
@ Escape artist:
Agreed re: interest rates or inflation: But it wont be lead by the RBA. It will (eventually) lead by the market due to loss of faith in the government and our dollar.
I think domestically the Aussie economy will continue to see ridiculously tough conditions. Previous recessions were short and sharp, but this has been dragging on for well over 3 years for most business owners: Out of my circle of friends I am the only one remaining: The others have pursued government jobs: too hard to be self employed (even the cash economy has slowed to a trickle).
China: agreed, massive wild card:
USA: massive wild card: Massive stock market bubble eg. Tesla cars valued at 600 times earnings…….Who wants to wait 600 years to get their investment back: To all the tesla bulls I say “really? you want to bet on a start up, rather than Toyota who took prius from concept to release in 12 months or less?”
Property is anyones guess: Fundamentally it will crash at one time. Practically though, it’s still rising: Even here in Adelaide you should see the looks I get from people when I respond to the old ‘When are you going to buy?’
My response of ‘I’m not paying half a million bucks for an average POS house in Adelaide: Maybe in London or New York, but not in Adelaide’ Most look at me with confusion that says “what are you on about” The other half just tune out.
As for import prices. What a laugh: From a rural back ground, I don’t understand how petrol can be said to be expensive! $70 of petrol gets me to and from my parents over 3 hrs away. I’ll gladly trade $70 vs 6 days bike riding, or 100hours of walking etc.etc.
In fact, if fuel wasn’t so damn cheap, then half of the worlds financial mess would be fixed! If it cost $6,000 to get a car here by boat, rather than $200 then maybe, Nissan, Mitsubishi, Holden, Toyota would still be building cars here……. May be if phones cost $300 to get to Australia, rather then $10 we would be building phones here?…..See? Fossil fuels are cheap! Cheap I tell you. Put $100 in your car and it will go all day: Spend $100 on an employee and see what you get…2, maybe 3 hours tops……
I guess, another major wild card that no one is speaking of is the middle east, we still see Syria at war, Afghanistan will almost certainly collapse. A good fuel spike would be a surprise for most.
I remember a documentary (I think it was addicted to money) that said due to the fiat world currency the GFC would see the end to the mostly world wide peace experienced over the last 30 years….That has proved to be correct. Most Australian’s have no idea that even in Europe (spain, italy, france, greece etc) there have been VIOLENT protests, massive destruction of property and personal financial wealth.
We now see a federal government in chaos, with the budget: The desire to do away with bulk billing is purely and simply aimed at relieving the budget pressure in 5/10/15 years. Someone whispered in the conservatives ears about what is in store: and it’s no fun for anyone.
Anyways: Happy New Year! lol
I left Italy 2.5 years ago because the economy was going down the toilet. My big gripe with things over there was that you needed government permission to do ANYTHING, and it was highly inefficient (plus expensive), though on the plus side officials frequently turned a blind eye to things because people actually matter there. Well here in Australia we are starting to need permission to do anything, but it’s relatively efficient, so people tolerate it. Only thing is now on a daily basis you hear of some stupidly draconian law being enforced here. You can now be fined for leaving your car window down to far or taking a foot off the motorcycle peg while riding. What’s more, a lot of people think this is a good thing!
I don’t plan on moving back to Europe any time in the future, but I’m sure not going to spend half a million on a mediocre house that will have me enslaved by debt for the next umpteen years and locked into a country where free will is actively discouraged.
We recently left Australia due to cost of living. (We still earn in AUD, work remotely but at times that are convenient for us)
The cost of good food, medical care, entertainment AND a house here are all more than covered for by the interest only portion of our savings. (We saved to buy a house but it does not make financial sense in Australia any longer).
There is even interest money left at the end of each week! Salaries go untouched into the Savings account which keeps growing.
Regrettably it seems that it is best to treat Aus like a giant mine and export earnings to fund a reasonably priced life elsewhere.
The openness and friendly nature of society here is the cherry on the cake – everyone has time and a buck for a beer. Life is good.
3s – would you mind to tell us where you have found paradise on earth? We might join you…….I could also live from my interest income.
@ 3s & JJ
Here too, we could live on interest: But ironically (and I bet it was the same for you) our “mortgaged to the hilt” friends look down on us with pity because we ‘missed’ the property boat.
Funny how living a non-consumer driven life, driving ordinary (and now somewhat old) cars and seeing through the property myth has positioned us as far wealthier than any of our friends…..yet we are looked down upon.
Yet, we can enjoy an expensive meal out (and we do!) without wondering how this will effect our budget….We can take a weekend off anywhere at any cost (and we do!) without wondering how it will be paid for….Our fridge dies and we can pay cash for a bigger one by 10am the next morning (we recently did!)
And yet society says we are missing out because we don’t have a place of our own……Wow, the vested interests have played a perfect hand.
Pfffft….I wouldn’t be buying at these prices if my sanity relied upon it.
@Matty
+1. Apparently because we rent, we don’t have a life. I’m in a similar boat – care free, pay cash for anything I want. If I get sick of my job, I just resign. A couple of years ago, I decided to start working four days a week and spend more time enjoying life.
Every now and again you talk to a property investor and their desires one day in the distant future, to live off their properties. I say, yeah it’s great to have that passive income and work part time. Then they ask how many properties I have? My response – none, I rent!. There is utter silence – they don’t know what to say. They can’t understand how you can set yourself up for life without leveraging up into the property market.
Forgive me for sounding alarmist here, but i see storm clouds ahead for the Australian economy.
Every week, we hear media reports of either companies closing down, downsizing, or moving offshore (due to Australia’s high wage structure and mountains of red tape), and the mounting job losses that comes with this. Manufacturing in Australia is virtually dead, retail is getting smashed by on line trading, the mining boom is coming to an end and there’s no job security any more.
So basically Australia’s economy is based on property speculation (aka a ponzi scheme), and what we dig out of the ground, and that’s about it
It’s often said Australia is the “lucky country”, and it many respects it still is, but luck is a finite resource, and it evetually runs out.
@ Pete:
It’s great to have passive income.
How many properties do you have?
None, I rent…..
…Silence…..
Haha, pure gold. I can see their faces. Of their expression, 1/3 says “what?”, 1/3 “how” and the remaining 1/3 says “he’s talking rot”.
Einstein said compounding interest is the great human invention, and it’s not by chance that the worlds richest group of companies (ie. banks) use this exact principle against the working class.
@Master Yoda, did you see Qantas’s rating is now junk? There’s your grim news for the week right there!
But let’s not panic though. Retail isn’t actually getting smashed by online trading, it’s being hammered by real estate prices combined with expensive wages and a public with less disposable income (due to expensive housing no less). In fact a lot of stores are buying stuff online and selling it on.
And strictly speaking property cannot be a ponzi scheme because property always has some value. That value SHOULD be determined by the markets, but market forces aren’t allowed to do their thing in Australia.
But yeah, we are probably going to have a lost decade or two.
Matty/Pete – We’re in the same boat.
We have a fantastic lifestyle, without worrying about budgets , pay cash for everything (including 2 x bmw’s) and enjoy life a lot more than my mortgaged to the hilt/can we afford to go out tonight/I have 500k in debt friends.
They look down upon us, and yet our lifestyle is better. If I lost my job tomorrow it wouldn’t matter – we could quite comfortably live off our savings for 5 years.
I feel sorry for one friend – he just bought a house (600k), has a 1 year old baby and just lost his job. He’ll either have to go bankrupt (his severance was 4 weeks) or find a job quick smart.
When it comes to buying a house – they can count me out!
I returned to Australia 7 years ago after a 7 year stint overseas. Was on the verge of becoming a real estate agent (received job offer and was a week off starting the REIWA course). However, it seemed at the time I was the only person who thought the property boom would not continue and I didn’t want to make a living from convincing people to buy property when I actually think it’s a bad idea so pulled out.
Obviously the boom didn’t keep going like everyone thought it would at the time, and although I have been close to buying a property several times I never went through with it. I preferred to wait until I thought the prices would be sustainable.
We’re now at the worst case scenario for me – the median price in WA has gone up to a record high of $515K yet the economy is showing absolutely no sign of being in shape to support high prices moving forward, yet we’re still receiving pressure to buy. When I say pressure, I mean the “see, I’m right, can’t you see prices are still going up as we’ve told you all along” kind of attitude.
It’s strange to think that I’m the only one that has been seeing cracks forming for so long but at the same time doubting myself because apparently I’ve been wrong. Very frustrating, planning to stick it out for one more year and leave the country again if this continues.
Kudos to this site though for publishing articles that are gold.