“Deep in negative territory”: One in four NSW businesses expect to cut staff

Posted by Gavin Chau

That’s the headline from yesterday’s paper. About 23% of NSW businesses plan to cut staff over the next three months as the cumulative effect of higher interest rates cuts consumer spending. This is also consistent with what the job ad data tells us nationally. The number of job ads has been a reliable leading indicator for the unemployment rate, and we can see a relative divergence between the two over the course of this year. It’s only a matter of time before the jaws snap shut and we see a spike in the unemployment rate.

This is the last part of the business cycle to fall before the central bank relents and starts cutting rates in order to support the economy. Along with this, we will start to see an easing of the so-called ‘sticky’ services inflation that everyone goes on about. There is no such thing as sticky services inflation, it’s just that it’s the last in the sequence to fall and a sure sign we are close to a pivot in the stance of the RBA.

There’s an internal joke in the research team about how good it will be to see more people unemployed, and as dark and terrible as that sounds, there’s a sliver of truth in it. The reality is that the monetary system is set up so that since at least 1987, bad economic news has been met with the same policy response by the central banks, cutting rates and/or liquidity injections. All the excess liquidity then finds its way into asset prices. This then re-ignites the economic cycle through the wealth effect, and we go through the same thing all over again.

What’s happening in other news?

This week, we have the same crazy situation where the RBA must announce an interest rate today while the GDP data will be released tomorrow. Philip Lowe refused to change the dates of the meeting. This afternoon was his last rates meeting, and the rumour is that Michele Bullock, the new RBA chief, will rectify this situation. As expected, the rates remain unchanged and it’s interesting to see how quickly those who were still calling for more rate rises as of last month have now flipped and are calling for rate cuts. From memory, Westpac is now predicting six interest rate cuts by 2025 and Commonwealth Bank is predicting four rate cuts next year. If we were to annualize the last three monthly inflation CPI figures from the ABS, the inflation rate is already 2.7% and decelerating.

Property prices have also risen for the sixth consecutive month as the market begins to sniff out the coming interest rate cut. This further supports our broader investment thesis that we have now seen a bottoming of the property market. We are now in the nascent stages of an enormous bull run that will peak around 2027. For those who have purchased recently, congratulations. In 2027 when you reflect on this, it will look like a heroic decision. For those who haven’t made a move yet, this is likely the best opportunity we’ve been presented with since 2008.

Posted by Gavin Chau, on 5th Sep 2023