Economic Activity

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GUEST OBSERVER
The six month annualised growth rate in the Westpac- Melbourne Institute Leading Index, which indicates the likely pace of economic activity relative to trend three to nine months into the future, rose from –0.15 percent in June to –0.12 percent in July. 
The signal from the reading for the Index in July is consistent with the message from June.
While the growth rate of the Index remains below zero, indicating a continuation of the below trend momentum seen over the last 15 months, it has improved significantly since the start of the year. Indeed, this latest reading suggests growth over the next three to nine months will be almost around trend. That outlook is more consistent with Westpac’s forecast for growth holding steadily around a 3 percent pace over the course of both this year and next year.
The Leading Index growth rate has lifted from being 0.92% below trend in February to 0.12 percent below trend in July.
<a href="/images/2016/08/17/Screen%20Shot%202016-08-17%20at%2010.59.16%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/08/17/Screen%20Shot%202016-08-17%20at%2010.59.16%20AM.png" alt="">
The main contributors to this growth improvement are: commodity prices (+0.64ppts); the sharemarket (+0.52ppts); US industrial production (+0.19ppts); and dwelling approvals (+0.04ppts). Partially offsetting these improvements have been a deterioration in aggregate monthly hours worked (–0.40ppts); the Westpac MI Consumer Sentiment Expectations index (–0.10ppts); and the Westpac –MI Unemployment Index (–0.06ppts). The yield curve spread exerted slightly more downward pressure over the period (–0.03ppts).
In assessing the components of the Index that have contributed to the lift since the start of the year, improving international conditions have been largely responsible for the result. These components (the share market, commodity prices and US industrial production) have been consistently supportive despite global shocks and uncertainties particularly associated with ‘Brexit’; the US election; Fed interest rate policy; and China’s efforts to deal with a structurally slowing economy. 
The Reserve Bank Board next meets on September 6. Having, as expected, cut rates at its August meeting to 1.5 percent we expect that it will hold rates steady next month.
Markets are not anticipating another move until November. At this stage we expect rates will be held steady in November. The two recent rate cuts have been in recognition of the sharp downgrade in the inflation outlook. No improvement can be expected in that outlook although the September quarter inflation report is likely to confirm that prospects for a further deterioration in the inflation environment are limited.
Momentum in the domestic economy, particularly around the labour market, is likely to improve over the next few months. Furthermore, developments in the commodity markets and the outlook for US interest rates are likely to take some pressure off the Australian dollar allowing the Reserve Bank to be patient.
BILL EVANS is chief economist of <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>. 
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Leading Index consolidates further: Westpac's Bill Evans

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EXPERT OBSERVER
Employment rose by 26,700 jobs in February – after increasing by 12,900 in January (previously estimated at +13,500). Full-time jobs rose by 6,700 with part-time jobs up by 20,000. Economists had tipped an increase in total jobs of around 8,000 and a jobless rate near 5.3 per cent.
The unemployment rate fell from 5.29 per cent (to two decimal places) in January to 5.10 per cent in February in seasonally adjusted terms. In trend terms, the jobless rate was steady at 5.1 per cent in February.
Hours worked fell by 3.0 per cent in February, but were up by 0.5 per cent over the year. In trend terms, hours worked were up by 0.8 per cent on the year.
Participation rate: The participation rate eased from 66.1 per cent to 66.0 per cent in seasonally adjusted terms. In trend terms the participation rate was steady at 66.0 per cent.
Unemployment across states in February: NSW 4.6 per cent (January 4.5 per cent); Victoria 5.3 per cent (5.4 per cent); Queensland 5.6 per cent (6.2 per cent); South Australia 5.8 per cent (5.7 per cent); Western Australia 5.2 per cent (5.7 per cent); Tasmania 5.0 per cent (5.7 per cent). In trend terms, Northern Territory 5.5 per cent (5.5 per cent); ACT 2.9 per cent (3.0 per cent).
What does it all mean?
To some extent today's data is ancient history. The COVID-19 coronavirus crisis really started to impact the broader economy in March. The impact of the virus in February was largely on tourism-dependent businesses and regions, and on the education sector. However the February jobs data would have also incorporated the effects of the bushfires that impacted so many of the country's regions..
That said, there was a positive lead for today's jobs figures from the January Department of Employment skilled vacancies series. And while a lot has happened over March, the jobs data for February – just like the retail trade figures – were indeed encouraging. And especially of encouragement was data showing the female jobless rate equalling the lowest rate in 11 years. And while monthly job figures at a state level are volatile, Tasmania's jobless rate is the lowest for over 8 years with Western Australia's jobless rate the lowest rate in over 5 years. The ACT's trend jobless rate is the lowest in 11 years.
The Bureau of Statistics "confirmed that the disruption from the bushfires did not have a notable impact on key headline statistics".
The outlook for the job market is challenging. While supermarkets, grocery wholesalers and transport groups are looking to hire staff, airlines, hospitality, sporting and cultural sectors will struggle to retain workers. So the next Federal Government support package will be super-important. It will be important for the Government to do all that it takes to keep Aussies in jobs.
It serves no value – and indeed it may be misleading – to try and forecast in the current environment. Much will depend on how quickly active coronavirus cases peak in Australia, how aggressive State and Federal governments are in supporting businesses and how quickly vaccines and treatments are developed to deal with COVID-19.
There is one thing no Australian should do – underestimate the resilience of the economy. Australia hasn't posted a recession in 28 years, despite all manner of shocks, including the global financial crisis. And while it will be more difficult to avoid a downturn this time, our economy should also bounce back quickly.
CRAIG JAMES is the Chief Economist of CommSec
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Job market in good shape ahead of virus crisis: CommSec's Craig James

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GUEST OBSERVER
The six month annualised growth rate in the Westpac-Melbourne Institute Leading Index, which indicates the likely pace of economic activity relative to trend three to nine months into the future, fell from 1.11 percent in March to 0.92 percent in April. 
This marks the ninth consecutive month where the growth rate in the Index is at or above trend. That followed a period of seventeen consecutive months where the growth rate had been below trend. That sustained period of below trend growth in the series had been pointing to the weakness we saw in the economy in the September quarter (although no lead indicator could have prepared us for a negative growth print).
The resumption of positive growth in the Index in August last year gave us some comfort that the bounce back in growth in the December quarter to 1.1% could have been anticipated.
While the strong bounce back in the December quarter was partly statistical in response to the negative quarter in September the ongoing positive signal from the Index is consistent with solid growth through most of 2017.
In his statement following the Reserve Bank Board meeting on May 2 the Governor noted: “Growth is expected to increase gradually over the next couple of years to a little above 3 percent”.
Recall that it is generally accepted by the market and in official circles that trend growth in the Australian economy is around 2.75 percent so a confident prediction of “a little above 3 percent” would be consistent with the Index remaining clearly positive for an extended period.
<a href="https://www.propertyobserver.com.au/images/2017/05/24/Screen%20Shot%202017-05-24%20at%2010.44.42%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/05/24/Screen%20Shot%202017-05-24%20at%2010.44.42%20AM.png" alt="">
The Bank’s current spot forecasts for growth are: 3 percent in 2017; 3.25 percent in 2018 and 2019 (to June).
Westpac concurs with the Bank’s forecast of 3 percent growth through 2017. That is above trend and consistent with the positive leads from the Index over the last nine months.
However we do have concerns for growth beyond 2017. Prospects for 2018 look discouraging. Housing construction is likely to be contracting through 2018 while export growth will slow and the terms of trade are likely to be falling, slowing nominal income growth.
Prospects for an offsetting boost from household spending and business investment are not encouraging given the ongoing negative feedback loop from weak labour incomes to consumption and sales.
The Leading Index growth rate has lifted over the last six months from 0.25 percent in November to 0.92 percent in April. Until recently the key drivers of that improvement had been global factors: rising commodity prices and the steepening of the yield curve.
In April both of these components slowed with the change in the 6 month contribution being -0.19 percentage points for commodity prices and -0.05 percentage points for the yield curve (which has recently been flattening).
However, other international factors are still supportive of the Index – US industrial production has contributed 0.33 percentage points to the increase in the Index while ASX200 has contributed 0.29 percentage points.
On the domestic front dwelling approvals have contributed 0.19 percentage points; the Westpac-MI Unemployment Expectations Index 0.11 percentage points; and Westpac-MI Consumer Sentiment Expectations Index 0.06 percentage points.
The only ‘domestic’ component dragging on the Index is “aggregate monthly hours worked” which reduced the index growth rate by 0.08 percentage points between November and April.
The Reserve Bank Board next meets on June 6. Policy is firmly on hold as the Bank assesses developments particularly in housing and labour markets.
As discussed, the Governor expects a period of sustained above trend growth over the course of 2018 and 2019.
“That view would be broadly consistent with markets which continue to expect the Reserve Bank to be raising rates next year (although the strength of this conviction does vary over time). Consistent with the Leading Index we do concur with the Bank’s forecast for 3 percent growth in 2017 but expect a slowdown next year.
Such a development would eliminate any ‘pressure’ to raise rates next year – we continue to expect rates to be on hold in 2018.  
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BILL EVANS is chief economist of <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>.
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Leading Index eases back a little: Bill Evans

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GUEST OBSERVATION
Not a week goes by without a news story (or a few) about people losing their jobs to robots, or the potential effects of a rapidly changing labour market. We are told repeatedly about how many jobs are going to be lost. Both unskilled and skilled jobs are predicted to disappear.
These risks are no doubt real, if uncertain in their magnitude. But these prognoses are largely the work of academics and economic forecasters. How do Australians feel about their job prospects in an age of automation? Rather than robots, the 25th ANUPoll finds our greatest concerns are the risks posed by poor management and jobs going overseas.
The ANU Centre for Social Research and Methods with the Social Research Centre recently asked a representative sample of more than 2,500 Australians about their anxieties related to the future of work. The ANUPoll finds that Australians are reasonably sanguine about their current jobs. However, we are concerned about finding employment in the future if we lose our job.
Pointedly, Australians are more concerned about the threats posed by poor business management and international workers willing to work for lower wages than about the prospect of our jobs disappearing through automation. To put this another way, we are more worried about the globalisation of employment and trade than about competition from robots.
What did we ask and what did we find?
A core question in this ANUpoll is: “Thinking about the next 12 months, how likely do you think it is that you will lose your job or be laid off/have to lay off employees or close the business?”
The overwhelming majority surveyed believe it is “not at all likely” (44.9%) or “not too likely” (42.8%).
Australian workers are quite comfortable with their current job security. But the level of comfort varies by sector of employment.
<img src="https://images.theconversation.com/files/229681/original/file-20180728-106524-57rt3d.png?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip" alt="">
Workers in the arts and recreation sector feel the most secure: 62.5% believe it’s “not at all likely” they will be laid off or need to lay off employees. At the other end of the spectrum, only 25.8% of workers in the electricity, gas, water and waste industries think it’s not at all likely.
We also asked workers: “If you were laid off how easy would it be for you to find a job with another employer with approximately the same income you now have?”
More than half – 54.6% – say finding an equivalent new job would be “not easy at all”. Only 10% believe it would be “very easy”.
Responses to this ANUPoll suggest Australian workers feel largely comfortable about their current employment but are less optimistic about their prospects should they become unemployed.
Sources of job insecurity
Workers may feel insecure about their employment for many reasons. We asked Australian workers about their level of concern about six different potential threats to their job.
<img src="https://images.theconversation.com/files/229682/original/file-20180728-106524-16s9nxv.png?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip" alt="">
The most common concern is that poor management of the company that employs them will lead to losing their job, with 14.7% “very concerned” by this threat and 27.6% “somewhat concerned”. This is followed by: their overall industry is shrinking; their employer might find someone else in Australia who is willing to do the job for less money; and their employer might finding someone overseas who is willing to do their job for less money.
People are least concerned that employers may use machines or computers to replace human workers. Only 8% are “very concerned” and 9.8% “somewhat concerned”.
This is followed by an inability to keep up with the technical skills needed to do their job, with 6% “very concerned” and 15.2% “somewhat concerned” about this.
Why should we be concerned about the future of work?
The labour market is no doubt changing. New occupations are being created as others become more precarious.
Occupations that rely on creativity or human-to-human interaction are both being developed and expanding their share of the labour market. Those based on routine tasks, even complicated ones, are set to employ fewer and fewer workers.
Labour markets have always adjusted to new circumstances. However, we can reasonably argue that the current transformation of work will be more comprehensive and more rapid than before. This is at least partially due to a confluence of significant trends: increased computing speed, decreased computing costs, greater network speed and capacity, increased availability of data, the lessening of some barriers to international trade, and political and economic change in countries with large skilled and semi-skilled workforces.
These changes are having political ramifications. Voters’ anxiety about the labour market and their job prospects was significant in the election of Donald Trump in the US, Brexit in the UK and the increased success of populist parties and platforms in many countries.
What to do about job security
Attention is increasingly shifting from merely describing trends in job security and the future of work to understanding the attitudes and anxieties of the current and future workforce. These attitudes will help determine the effect of labour market change (perceived and actual) on the subjective well-being of the population. Attitudes to job security and the future of work also may affect people’s receptiveness to related policy proposals.
How to respond to the public’s views on job security depends on how accurate you think those perceptions are. There are many suggested policy responses. Examples include a universal basic income and re-regulation of the labour market.
<img src="https://counter.theconversation.com/content/100728/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1">If you think the perceptions identified in the recent ANUPoll are a reasonable assessment of the risks to people’s jobs, then the focus should be at least as much on outsourcing and management practices as on skills mismatch and automation. If you think the public is underestimating these latter potential threats and under-investing in the retraining and skills development that would reduce their negative consequences, then greater public attention might be justified.
Nicholas Biddle, Associate Professor, ANU College of Arts and Social Sciences, Australian National University
Jill Sheppard, Lecturer, School of Politics and International Relations, Australian National University
Matthew Gray, Director, ANU Centre for Social Research and Methods, Australian National University
This article was originally published on The Conversation. 
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j.ballantyne1990-6AQqhLzZaK

Australians worry more about losing jobs overseas than to robots

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GUEST OBSERVATION
China’s rise as a <a href="https://theconversation.com/soft-power-goes-hard-chinas-economic-interest-in-the-pacific-comes-with-strings-attached-103765" target="_blank">global power</a> is driving new flows of people, ideas and capital between China and Australia. Australian cities need to adapt to this new geopolitical reality.
For some, these changes promise new opportunities to fulfil a “<a href="http://www.defence.gov.au/whitepaper/2013/docs/australia_in_the_asian_century_white_paper.pdf" target="_blank">vision of being a land of increased opportunity, prosperity and fairness</a>”. Others see Asian “invasion” and “takeover” as a threat to Australia’s white identity and <a href="https://www.propertyobserver.com.au/https://www.hardiegrant.com/au/publishing/bookfinder/book/silent-invasion-by-clive-hamilton/9781743794807" target="_blank">political system</a>.
A new <a href="https://doi.org/10.1111/1745-5871.12311" target="_blank">collection of articles</a> demonstrates that the impact of the Asian Century on Australian cities defies both dystopian claims of a “Chinese takeover” and utopian visions of a harmonious urban multiculturalism.
<audio width="300" height="32" preload="metadata" controls="controls" data-duration="850" data-image="" data-title="Linda Jakobson, CEO of China Matters, on Australia's relationship with China." data-size="34018889" data-source="City Road Podcast" data-source-url="https://soundcloud.com/user-283789701/china_matters" data-license="CC BY" data-license-url="http://creativecommons.org/licenses/by/4.0/"><source src="https://cdn.theconversation.com/audio/1327/china-matters-interview.mp3" type="audio/mpeg"></source></audio>
<div class="audio-player-caption">Linda Jakobson, CEO of China Matters, on Australia’s relationship with China. <a class="source" href="https://soundcloud.com/user-283789701/china_matters" target="_blank" rel="nofollow">City Road Podcast</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/" target="_blank">CC BY</a>32.4 MB <a href="https://cdn.theconversation.com/audio/1327/china-matters-interview.mp3" target="_blank">(download)</a>
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Changing settlement patterns
The profile of migrants who arrived from mainland China since 2000 <a href="https://onlinelibrary.wiley.com/doi/10.1111/1745-5871.12293" target="_blank">is changing</a>. They are more highly skilled, educated and investment-focused than earlier migrants.
Their settlement patterns in Australia <a href="https://onlinelibrary.wiley.com/doi/10.1111/1745-5871.12293" target="_blank">are also changing</a>. Sydney is still home to half of all China-born migrants in Australia. However, the proportion of migrants settling in other capital cities is increasing.
In Sydney in 2001, China-born residents represented over 10% of the population of only three suburbs. A decade later, the number of such suburbs had risen to 22.
Smaller increases were evident in Melbourne (from one suburb in 2001 to seven in 2011) and Brisbane (zero to four).
However, Hurstville was the only Australian suburb in 2011 where China-born residents represented over 25% of the population.
This suggests a pattern of settlement that is neither extreme residential segregation along ethnic lines nor full <a href="https://onlinelibrary.wiley.com/doi/10.1111/1745-5871.12293" target="_blank">“spatial assimilation”</a>. Rather, it is best understood in terms of multiple moderate concentrations.
Changing homes
The choices Chinese migrants make about their homes in Australia are significant in shaping Australian cities.
The homes Chinese migrants make in Australia involve complex relations with both their past homes in China and their new lives as Australians.
Over time, many adopt Australian practices of housing consumption. This includes <a href="https://books.google.com.au/books/about/Migration_Settlement_and_the_Concepts_of?id=Fv79oAEACAAJ&amp;redir_esc=y" target="_blank">the preference for detached suburban houses rather than apartments</a>.
One environmental implication of this is that the housing footprint of China-born migrants in Melbourne increased <a href="https://theconversation.com/chinese-migrants-and-urban-consumption-in-australia-local-impacts-and-global-implications-103921" target="_blank">five-fold after migration</a>.
Nevertheless, Chinese migrants are <a href="https://theconversation.com/higher-density-and-diversity-apartments-are-australia-at-its-most-multicultural-97176" target="_blank">over-represented in apartment buildings</a>. Nationally, only 7% of Australian-born people live in apartments, compared to 31% of those born in northeast Asia, including China.
Changing cultural relations
Despite the policy shift from White Australia to multiculturalism, racism remains prevalent in Australian cities. A narrative about <a href="https://www.tandfonline.com/doi/full/10.1080/07256868.2018.1459516" target="_blank">white victimhood</a> is often used to counter evidence of discrimination against non-whites.
One recent <a href="https://theconversation.com/asians-out-not-in-this-suburb-not-in-this-apartment-103919" target="_blank">study</a> found Asian Australians have experienced twice as many instances of racism and discrimination as have other Australians. Specifically, 58% of Asia-born participants experienced some measure of discrimination when renting or buying a house.
Apartment buildings have become a <a href="https://onlinelibrary.wiley.com/doi/10.1111/1745-5871.12282" target="_blank">key site</a> of <a href="https://link.springer.com/chapter/10.1057/9780230244474_2" target="_blank">intercultural encounter</a>. Often this involves tensions over the <a href="https://theconversation.com/higher-density-and-diversity-apartments-are-australia-at-its-most-multicultural-97176" target="_blank">management of common areas, washing hung on balconies, or even cooking smells in buildings </a>.
Consequently, strata or body-corporate committees have become important institutions for mediating intercultural relations in Australian cities.
In suburbs with increased concentrations of China-born residents, intercultural tensions are often expressed through local urban planning conflicts. In some suburbs, for example, white residents have <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/1745-5871.12268" target="_blank">blamed Chinese investors</a> for driving residential densification and the loss of “neighbourhood character”.
At the same time, shared interests in relation to buildings, neighbourhoods and shared social class identities can <a href="https://www.propertyobserver.com.au/https://www.palgrave.com/gp/book/9789811313660" target="_blank">help to bridge ethnic and racial difference</a>.
Housing market
<a href="https://www.tandfonline.com/doi/abs/10.1080/00049182.2017.1317050" target="_blank">Chinese investment </a>in residential and commercial real estate increased from A$2.4 billion in 2009-10 to A$24.3 billion in 2014-15. China was one of the largest sources of capital. Asian foreign investors accounted for 9.4% of purchases of new dwellings in New South Wales in the fourth quarter of 2015.
While much of this investment was channelled into new housing supply, <a href="https://onlinelibrary-wiley-com.ezp.lib.unimelb.edu.au/doi/10.1111/1745-5871.12280" target="_blank">public concern about the impact of foreign investment on housing affordability</a> is rising.
<a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/abac.12110" target="_blank">One estimate</a> suggests that if foreign investment had been held steady from 2004 to 2014, house prices in Sydney and Melbourne would have risen by about 50% compared with the actual growth of 67%. Therefore, most of the increase in house prices cannot be attributed to foreign investment.
By pointing to foreign investment as the main reason for Australia’s housing affordability woes, media coverage and government statements have often shifted attention away from the <a href="https://theconversation.com/affordable-housing-policy-failure-still-being-fuelled-by-flawed-analysis-92993" target="_blank">structural causes</a> of housing unaffordability and the various drivers of <a href="https://www.tandfonline.com/doi/abs/10.1080/19491247.2016.1270618" target="_blank">foreign investment</a>.
Changing Australian cities in the Asian Century
Australian cities in the early 21st century face major challenges relating to housing, transport, jobs and food security.
Racialised talk of “Asian invasion” blames Chinese migrants and investors for many problems. Yet the foundations of these problems run deep into Australia’s <a href="https://www.rowmaninternational.com/book/the_geopolitics_of_real_estate/3-156-775f5a7c-6f6f-45fe-9a2a-fdfaf44f5727" target="_blank">urban histories</a> and our market-driven approach to city-making.
Debate about the impact of the so-called Asian Century on Australian cities must move beyond a discussion about utopian opportunities and dystopian threats. The reality on the ground in Australian cities is far more complex than this binary thinking.<img src="https://counter.theconversation.com/content/103917/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1" style="border: none !important; box-shadow: none !important; margin: 0 !important; max-height: 1px !important; max-width: 1px !important; min-height: 1px !important; min-width: 1px !important; opacity: 0 !important; outline: none !important; padding: 0 !important; text-shadow: none !important;">
Dallas Rogers, Program Director, Master of Urbanism. School of Architecture, Design and Planning, University of Sydney
Ilan Wiesel, Senior Lecturer in Urban Geography, University of Melbourne
This article is republished from <a href="http://theconversation.com" target="_blank">The Conversation</a> under a Creative Commons license. Read the <a href="https://theconversation.com/how-australian-cities-are-adapting-to-the-asian-century-103917" target="_blank">original article</a>.
Main photo: More than 25% of Hurstville residents were born in China, but the Sydney suburb is the exception to the rule. <a href="https://www.propertyobserver.com.au/https://www.flickr.com/photos/philipterrygraham/36115452672" target="_blank">Philip Terry Graham/Flickr</a>, <a href="http://creativecommons.org/licenses/by/4.0/" target="_blank">CC</a> <a href="https://theconversation.com/profiles/dallas-rogers-5269"> </a>
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How Australian cities are adapting to the Asian Century

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EXPERT OBSERVER
The past financial year saw a roller coaster ride for investors.
Share markets plunged into Christmas only to rebound over the last six months. This note reviews the last financial year and takes a look at the investment outlook for 2019-20.
 A volatile but good year for diversified investors The past financial year saw pretty good returns for investors. 
But it didn’t feel so good around Christmas as a combination of worries – President Trump’s trade war with China, a slowdown in China, Fed rate hikes, an end to quantitative easing in the Eurozone, falling property prices and election fears in Australia saw share markets fall sharply.
In fact, from its September high to Christmas Eve US shares plunged 20%. But in the last six months share markets have rebounded as while the trade threat has run hot and cold and tensions in the Middle East have escalated central banks have turned dovish with many either easing (like the RBA and PBOC) or signalling that monetary easing is likely (such as the Fed and ECB).
This has seen global share markets rebound sharply with Australian shares having their best June half since the early 1990s – helped along by the return of the Coalition Government. So for the financial year as a whole global shares returned 6.6% in local currency terms and thanks to a fall in the Australian dollar they returned 12% in Australian dollar terms.
Australian shares returned 11.6% touching an 11-year high. Cash and bank deposits had poor returns not helped by the RBA cutting the cash rate to a new record low in June.
But bonds had a spectacular turnaround as rising bond yields on the back of Fed tightening a year ago gave way to plunging yields – to record lows in many countries - as inflation subsided and central banks turned dovish resulting in Australian bonds returning 9.6%.
The plunge in bond yields reinvigorated the search for yield and so helped yield-sensitive listed property and infrastructure have strong returns.
Unlisted property and infrastructure continued to do well, despite a rougher ride for retail property. Balanced growth superannuation funds are estimated to have returned around 7% after taxes and fees.
For the last five years their returns have averaged around 7.4% pa, which is not bad given sub 2% inflation.
Australian residential property fared poorly though with average capital city prices down 8%, but signs of stabilisation have emerged recently helped by the election result and rate cuts.
Key lessons for investors from the last financial year
1. Turn down the noise – despite the endless predictions of financial disaster it turned out okay again. 2. Maintain a well-diversified portfolio – while shares had a rough ride, bonds, unlisted assets and exposure to foreign currency for Australian investors provided some stability. 3. Cash is still not king – while cash and bank deposits provided safe steady returns, they remain very low.
The negatives which will likely constrain returns…
There are a bunch of threats which are likely to lead to bouts of volatility and constrain returns. 
First, President Trump’s trade war with China and threats against other countries is adversely affecting business confidence and investment. Trade talks with China have resumed and both sides have a strong incentive to resolve the issue but there is a risk that they may not. 
Second, global growth indicators are well down from their highs at the start of last year. And the yield curve in the US is flashing a recession warning.
Third, the risk of conflict with Iran has escalated after the US ditched its commitment to the 2015 Iran nuclear agreement. As roughly 20% of global oil demand flows through the Strait of Hormuz its disruption would threaten sharply higher oil prices. 
Fourth, US political risk is likely to ramp up with the debt ceiling needed to be increased around September (remember the debt ceiling/US ratings downgrade of 2011!) and Democratic presidential debates highlighting a sharp leftward lurch at a time when the top Democrat nominees are polling ahead of Trump. 
Fifth, Eurozone risks remains with an increased risk of a no deal Brexit which would be a big drag on the UK economy as 46% of its exports go to the EU and a small drag on European growth as 6% of its exports go to the UK. More important for the Eurozone is the ongoing tensions around the still worsening Italian budget deficit. 
Finally, in Australia while house prices are showing signs of being at or near the bottom, rising unemployment risks resulting in a negative feedback loop and another leg down, which in turn would further weigh on economic growth.
…but a bunch of things should keep returns positive
However, there are a bunch of positives providing an offset. 
First, while global growth indicators are soft, there has been a loss of downwards momentum in the Eurozone and globally it still looks like the growth slowdowns of 2011-12 and 2015-16. 
Second, the fall in global inflation has seen central banks move from tightening to easing to various degrees, providing a renewed stimulus to growth. This is a big difference to a year ago when it was thought that the hurdle for central bank easing was high. •
Third, while the US yield curve is flashing red it’s not always reliable, it may be distorted by central bank quantitative easing and it has long lead times. What’s more there is still little sign of the sort of excess that normally precedes recessions – there is still spare capacity globally, growth in private debt remains moderate, investment as a share of GDP is around average or below, wages growth and inflation remain low and we are yet to see a generalised euphoria in asset prices. The current growth slowdown globally maybe seen as extending the investment cycle by delaying the build up of recession driving excesses. 
Fourth, while Trump’s trade wars and maximum pressure on Iran may reflect the pursuit of international relevance at a time when his ability to do anything in the US is constrained (having lost Congress) it is in his interest to resolve both in a non-disruptive way as American’s don’t re-elect presidents when unemployment is rising and oil prices are surging. 
Fifth, share valuations are not excessive. While price to earnings ratios are moderately above long-term averages in developed countries, this is to be expected in a world of low inflation. Valuation measures that allow for low interest rates and bond yields show shares to be fair value or cheap.
Finally, while unemployment is expected rise to 5.5% this year in Australia it should be limited as infrastructure spending remains strong, mining investment bottoms out, export demand holds up with overall growth helped by monetary and fiscal stimulus and the low Australian dollar.
What about the return outlook?
The threats around trade and geopolitical risks along with the tendency for seasonal weakness out to September/October could see a pull back in share markets and returns are likely to be constrained. But easy money and the absence of large-scale economic excess should help extend the cycle and keep returns positive at around 6% over the next 12 months from a well diversified portfolio.
Looking at the major asset classes:
Cash and bank deposit returns are likely to be poor at around 1% as the RBA is expected to cut the cash rate to 0.5% by early next year. Investors still need to think about what they really want: if it’s capital stability then stick with cash but if it’s a decent stable income flow then consider the alternatives with Australian shares and unlisted commercial property and infrastructure still offering attractive yields.
Sovereign bond investors benefit from falling yields but once they stop falling expect returns to slow again as yields are now very low. Bonds are good portfolio diversifiers though. 
Listed and unlisted commercial property and infrastructure are likely to benefit from the ongoing “search for yield” and okay economic growth. 
Residential property still has a bit more short-term downside risk but expect flattish prices through calendar 2020 as an upwards drift in unemployment constrains returns. 
Shares are at risk of a correction into the seasonally weak September/October period, but okay valuations, reasonable economic growth and profits and even easier monetary conditions should see the broad trend in shares remain up.
Finally, the $A is likely to fall to around $US0.65 by year end as the RBA eases, but with significant short positions, the Fed easing too and the sharp 39% $A fall already seen since 2011 it has become a closer call.
Things to keep an eye on:
Global business conditions PMIs for any deeper slowing; the trade war – this needs to be resolved soon; Middle East tensions around Iran; US political risks; risks around Chinese growth; and Australian unemployment and house prices.
Conclusion
Returns are likely to be okay over 2019-20 as conditions are not in place for recession. But expect constrained returns - say around 6% for a diversified fund - and bouts of volatility.
SHANE OLIVER is the Head of Investment Strategy and Chief Economist at AMP Capital 
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2018-19 saw a rough ride for investors but it turned out okay: Shane Oliver

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EXPERT OBSERVER
Only last month share markets in the US and Australia were at record highs. But ever since President Trump ramped up the US-China trade war again at the start of August, financial markets have seen a significant increase in volatility. Share markets have had 6% or so falls from their highs to recent lows and bond yields have plunged to new record lows in many countries.
This note takes a looks at what is driving the market turmoil, the risk of recession and what it all means for investors.
Market turmoil – what’s driving it
The bout of market turmoil we have been seeing this month basically has three inter-related drivers. First, President Trump ramped up the US-China trade war again with another round of tariffs on China. (See Escalating US-China trade war). Second, Chinese economic data slowed more than expected in July and the manufacturing heavy German economy contracted in the June quarter.
This is on the back of weak global data. Third, economic uncertainty drove more money into bonds pushing bond yields down and driving a further “inversion” of bond yield curves – which is when long-term bond yields fall below short-term yields – leading to more talk of recession.
This all drove share markets down. Of course, the turmoil in Hong Kong, Brexit, tensions with Iran, political uncertainty in Italy and increasing risks that a Peronist government will return in Argentina aren’t helping. Talk of policy stimulus has provided some relief though with occasional sharp rallies in shares.
Australia is not in the trade war but anything that weakens global growth threatens our exports and confidence, so we are naturally seeing bouts of weakness in Australian shares and bond yields just like we did last year when the trade war started.
Reasons for concern
There are several reasons for concern. First, the trade war still shows no sign of letting up. Optimism on US trade talks with China have been dashed several times now, the threat of tariffs on autos remains and maybe China has decided to wait till after next year’s US elections.
Second, the trade war and the twists and turns it takes is weighing on business confidence and it’s hard to make firm investment plans when they may be rendered uneconomic by a tweet from Trump. This is particularly evident in a slump in manufacturing conditions PMIs worldwide. 
Third, it’s been hoped Chinese policy stimulus will offset the trade war for the last year now,but China has continued to slow. Fourth, inverted yield curves have preceded post-war US recessions so the recent inversion can’t be ignored.
Finally, global and Australian share markets are vulnerable to weakness after roughly 25% gains from their December lows to their July highs left them overbought and vulnerable to a correction. This risk is accentuated as the August to October period often sees share market weakness.
 Reasons for optimism
However, while the risks have increased there are several reasons not to get too concerned.
First, President Trump is getting twitchy about the negative economic effects of the trade war: he delayed some tariffs last week after sharp share market falls and had a meeting with major US bank heads on share market falls.
The historical record shows that US presidents get re-elected after a first term (think Nixon, Reagan, Clinton, Bush junior and Obama) except when there were recessions in the two years before the election and unemployment is rising (think Ford, Carter and Bush senior). Trump would be aware of this.
Share markets have regular corrections but major bear markets are invariably associated with recession and so Trump is wary whenever shares take a sharp lurch lower. As a result, our view remains that at some point Trump will seek more seriously to resolve the trade issue.
Second, policy stimulus is being ramped up: with numerous central banks now cutting interest rates and indicating that more cuts are on the way including from the Fed; the ECB looks like it will soon return to quantitative easing; Chinese economic policy meetings indicate that more policy easing is on the way; Germany is reportedly thinking about some sort of fiscal stimulus; and there is talk of more US tax cuts.
This is very different to last year when the Fed was tightening, the ECB ended QE and other central banks including the RBA looked to be edging towards tightening.
Third, while the risks have increased, a US or global recession remains unlikely: services indicators have held up well (see the first chart) and the services sector is the dominant part of most major economies; we have not seen the sort of excesses that precede global and notably US recessions – there has been no investment boom, private sector debt growth has been modest and inflation is low such that central bankers have not slammed the brakes on; &amp; monetary &amp; fiscal stimulus will provide support.
Finally, the decline in bond yields is making shares relatively cheap. The gap of 4.8% between the grossed-up dividend yield on Australian shares of 5.7% and the Australian 10-year bond yield of 0.94% is at a record high.
Similarly, the gap between the grossed up dividend yield and bank term deposit rates of less than 2% is very wide. In other words, relative to bonds and bank deposits shares are very cheap which should see them attract investor flows providing we are right and recession is avoided.
But what about inverted yield curves?
Long-term bond yields should normally be above short-term bond yields because investors demand a higher return to have their money locked away for longer periods. But sometimes long-term rates may fall below short rates.
This happened briefly in the US in the last week in relation to the gap between 10-year and 2-year bond yields but had already happened a few months ago in relation to the gap between the 10-year yield and the Fed Funds rate. 
This so called “inversion” is causing increasing consternation as an inverted US yield curve has preceded US recessions so it’s natural for investors to be concerned. But the yield curve is not necessarily a reliable recession indicator at present: it can give false signals; the lags from an inverted curve to a US recession averaged around 18 months in relation to the last three recessions so any recession may be some time off; various factors unrelated to US recession risk may be inverting the curve such as increasing prospects for more quantitative easing pushing down bond yields, negative German bond yields dragging down US yields and investor demand for bonds as a safe haven from shares; yield curves may be more inclined to be flat or negative when rates are low; and as noted earlier we have not seen other signs of an imminent US recession such as over-investment, rapid debt growth, excessive inflation and tight monetary policy.
So our base case remains that a US recession is not imminent. The Australian yield curve has also gone negative with 10-year bond yields of 0.94% below the cash rate of 1% but the gap between the 10 and 2-year bond yields only just positive. But it’s worth noting that Australian yield curve inversions around 1985, 2000, 2005-2008 and in 2012 were useless recession indicators
What does this all mean for investment markets?
In the short-term share markets could still fall further as trade and growth uncertainties remain and as we go through the seasonally weak months ahead.
This could be associated with further falls in bond yields. In fact, further share market weakness may be needed to get Trump to seriously resolve the trade issue (as opposed to just go through another trade talks/ breakdown cycle again).
However, providing we are right and recession is avoided, a major bear market in shares (ie where shares fall 20% and a year later are down another 20% or so) is unlikely and given that shares are cheap relative to bonds we continue to see share markets as being higher on a 6-12 month horizon.
What should investors do?
Since I don’t have a perfect crystal ball, from the perspective of sensible long-term investing the following points are repeating.
• First, periodic sharp setbacks in share markets are healthy and normal. This volatility is the price we pay for the higher long-term return from shares. After 25% or so gains from their lows last December shares were at risk of a correction.
• Second, selling shares or switching to a more conservative strategy after falls just locks in a loss. The best way to guard against selling on the basis of emotion is to adopt a well thought out, long-term investment strategy.
• Third, when growth assets fall they are cheaper and offer higher long-term return prospects. So, the key is to look for opportunities that pullbacks provide.
• Fourth, while shares may have fallen in value, the dividends from the market haven’t. The income flow you are receiving from a diversified portfolio of shares remains attractive. So for those close to or in retirement the key is to assess what is most import – absolute stability in the value of your investments or a decent sustainable income flow.
• Fifth, shares often bottom at the point of maximum bearishness. So, when everyone is negative and cautious it’s often time to buy.
• Finally, turn down the noise. In times of crisis the negative news reaches fever pitch, which makes it very hard to stick to a long-term strategy, let alone see the opportunities.
Dr. SHANE OLIVER Head of Investment Strategy and Chief Economist AMP Capital
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Plunging bond yields & weak share markets amidst talk of recession: Shane Oliver

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EXPERT OBSERVER
The Australian Industry Group (AiGroup) Performance of Services Index (PSI) fell from 55.2 points to 53.7 points in November. The ‘final’ CBA/IHS Markit Services Purchasing Managers’ Index (PMI) fell from 50.1 points to 49.7 points in November. A reading above 50 indicates an expansion of services sector activity.
According to the AiGroup: “Among the business-oriented sectors finance &amp; insurance reported positive results, logistics (wholesale trade, transport &amp; storage) was stable, while business &amp; property services contracted. Among the consumer-oriented segments ‘retail trade &amp; hospitality’ and ‘personal, recreational and other services’ were positive (specifically, "robust growth"), while ‘health, education &amp; community services’ contracted slightly.”
The CBA/IHS Markit November PMI data
“November data indicated that the decline in business activity occurred amid subdued demand conditions. New business intakes continued to increase at a marginal pace. The underwhelming sales trend was centred around the external market, with services exporters reporting a further reduction in international sales. Anecdotal evidence suggested that drought-related disruptions and global trade war impacts had dampened demand for Australian services.”
New vehicle sales
The Federal Chamber of Automotive Industries reported: The November 2019 market of 84,708 new vehicle sales is a decrease of 9,152 vehicle sales or -9.8 per cent on November 2018 (93,860) vehicle sales. November 2019 had the same number of selling days (25.7) as November 2018 and this resulted in a decrease of 356.1 vehicle sales per day
The Passenger Vehicle Market is down by 6,228 vehicle sales (-21.3 per cent) over the same month last year; the Sports Utility Market is down by 442 vehicle sales (-1.1 per cent); the Light Commercial Market is down by 1,835 vehicle sales (-8.8 per cent); and the Heavy Commercial Vehicle Market is down by 647 vehicle sales (-17.4 per cent) versus November 2018.
Sales across states and territories over year to November: NSW (down 9.1 per cent); Victoria (down 10.6 per cent); Queensland (down 10.7 per cent); South Australia (down 14.9 per cent); Western Australia (down 0.8 per cent); Tasmania (down 9.5 per cent); Northern Territory (down 20.7 per cent); ACT (down 14.7 per cent).
The biggest selling vehicle in October was the Toyota Hi-Lux (3,687) from Ford Ranger (3,491) and the Mitsubishi Triton (3,123).
The rolling annual total of new vehicle sales in November was 1,066,156, down 8.8 per cent on the year – the biggest annual decline in a decade (year to November 2009). Passenger car sales fell by 17.4 per cent on the year with SUVs down 3.4 per cent and “other vehicles” down 6.6 per cent.
In the year to November, SUVs accounted for a record 60 per cent of combined SUV and passenger vehicle sales.
What are the implications for interest rates and investors?
The Reserve Bank is now in ‘monitoring mode’ until the February 2020 Board meeting.
The new vehicle sales market is still not showing the benefit of tax cuts, low interest rates or higher home prices – at least not yet. Auto-dependent businesses will continue to face short-term challenges but 2020 is looking more positive
CRAIG JAMES is the Chief Economist at CommSec
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