Why are US interest rates going up and Australian interest rates coming down?
If the USA sneezes, Australia and the World catches a cold.
History has shown that the US economy was the lynch pin to the world’s economy and generally Australia followed suit. If this was the case, then why is the US Federal Reserve considering interest rate rises when the Australian reserve bank is predicting lower interest rates? Especially when you compare the economic Data which shows both economies performing at a similar pace….at least it appears that way on the surface.
Economy growth rates
US = 3.25 per cent
Australia = 3.1 per cent
US = 4.7 per cent
Australia = 5.00 per cent
US = 0.25-0.5 per cent
Australia = 1.75 per cent
Consumer price index
US = 1.1 per cent
Australia = 1.3 per cent
Let’s dig a little deeper
According to reports from the US they are as close to full employment as they have ever been … the unemployment rate of 4.7 per cent is the lowest since 2007.
Australia currently sits at 5 per cent but an ageing population and the retirement of the baby boomers is reducing the participation rate in the workforce and the end of the resources boom has led to a sharp slowdown in population growth thanks to fewer migrants arriving on 457 visas. According to the Australian Bureau of Statistics (ABS) this has reduced our annual population growth rate from 2 per cent to 1.4 per cent. Slower population growth and slower participation growth reduces the potential for growth.
Americans are spending more according to Federal Reserve reports. In April consumer spending rose at its fastest pace since 2006 with higher levels of consumer confidence. The economy is predicted to grow by 2.5 per cent in the second quarter with an annualised 3.25 per cent growth rate.
In Australia consumer spending remains subdued, the construction and renovation of houses is contributing to our growth numbers, business investment and confidence continues to fall sharply as mining companies shelve any expansion plans. Non-mining firms have also proven extremely reluctant to invest, a key threat to future growth all contributing to the Australian economy growing a lot slower than the US.
A Reuters poll recently showed US house prices are forecast to rise at more than double the current rate of underlying consumer prices and wages over the next few years, underpinned by steady and solid turnover in the housing market. While housing affordability is getting worse for first-time buyers, most analysts and economists polled by Reuters say that rents are even more prohibitive, which should prompt more young people who can manage to do so to buy their first homes. So while few expect a major boost to economic growth from the housing market, it is currently on a strong enough footing to withstand the Federal Reserve’s plans to gradually raise interest rates, which will also increase mortgage costs.
The ABS published month-over-month building approvals data for April on May 31, 2016. Building permits saw a steady rise of 3.0 per cent, much higher than the forecast for a fall of 3 per cent. Housing has been a significant variable in this cycle principally because it has also generated a lot of jobs. But with signs that the volume of new houses and units coming into the market is starting to run ahead of demand, the capacity of housing investment to continue to underpin growth is questionable. Affordability is still a concern and with recent discussion around negative gearing changes, many experts believe the Market will at best stabilise and in some areas retract.
What does this mean to mortgage holders?
Just because the US increases interest rates there is no need to panic about potential increases in Australia. Without drilling down into the economics it’s clear that we are more closely aligned with Asia.
The movement from a mining and resource driven economy to other areas will take some time and in the short term has taken the gloss off our economy. US rates have been low for a long period and will need an upward adjustment because their economy is performing well (bear in mind that our current base rate sits 1.25 per cent above the US rate which gives the Reserve Bank room to move downwards if necessary.
With the outcome of the election still being counted and uncertainty about our economy, don’t expect Australian interest rates to follow the US trend.
For further information about how Chan & Naylor can help assist you visit www.chan-naylor.com.au or phone 1300 250 122.