Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Summary: Aussie banks flying higher in today's trade as investors relish the prospect of deregulation keeping the credit spigots on in full force. Despite the indignation amongst consumer rights advocates, little regard is being paid to the costs of deregulation perpetuating an economic model reliant upon speculating on unproductive assets. As well as the broader costs to society as asset price inflation fuels wealth inequality and intergenerational wealth divides threatening future financial stability.
Following decades of malpractice uncovered by the Hayne Royal Commission scrutiny of responsible lending obligations was stepped up a notch. However, in a bid to sustain accruing residential property prices and keep credit flowing as Australia recovers from the fallout of the coronavirus crisis Treasurer Josh Frydenberg has announced an overhaul to the Credit Act to address “risk aversion” in the banking sector.
The deregulatory reforms will enact less prescriptive prudential lending standards currently overseen by APRA, binning the more onerous ASIC lending rules. Here comes the government put on the property market. Heading into 2021 the outlook for property prices was patchy at best with mortgage deferrals and wage subsidy schemes set to expire, immigration no longer providing a demand tailwind and unemployment remaining high. The reality is no one of knows what the underlying state of the consumer looks like, minus the additional and temporary government aid. However, with lending restrictions being rolled back if history is any guide credit growth will soar alongside house price inflation and unequal capital gains once more. Australia’s largest cities, already “severely unaffordable” on the basis of house price to income ratios (according to global research from Demographia), are about to get more unaffordable. Whilst households (already some of the most indebted on a global scale) load up, a structural inhibitor to growth. Welcome to 2020 where price discovery is a distant memory.
Unfortunately, the success of these moves will be costly and divisive via promoting the unequal distribution of income and wealth and fuelling intergenerational divides.
Asymmetric puts preserving asset prices alongside stagnating wages entrench wealth divides, which carries a societal cost alongside the risks posed for future financial and political stability.
The path to sustainable economic growth is an equitable one.
Addressing the fallout of the coronavirus induced recession should come with a vision for the future that does not tie the economy to an overleveraged property cycle. With governments already spending big, and set to continue as fiscal primacy takes hold, the measures that best serve the future are those that contribute to diversified and inclusive labour market and economic growth. Alongside promoting the transition to a greener economy.