Investment Theme

An analysis of Google search trends suggests that Australians are increasingly becoming concerned about the outlook for the economy, with the number of searches for “Australia recession” back at GFC levels. With consumer confidence at a four-year low, it appears that the RBA’s three interest rate cuts have done little to boost the confidence of Australian households. This is a concern in an economy where private consumption is the major driver of economic growth, accounting for around 55% of GDP. Combined with anecdotal evidence that the vast majority of Australian borrowers have kept their mortgage payments at pre-interest rate cut levels and are using higher household incomes to pay off debt, it suggests that the RBA’s hopes of a new housing and consumer boom may be misplaced.

Rise of the Zombies

Research from the Bank of International Settlements shows that the prevalence of zombie companies (defined as those companies over 10 years of age that cannot cover debt serving costs from current profits over an extended period) has ratcheted up since the late 1980s. The number of zombie firms in advanced economies is 12% of total companies. In addition, there is a high likelihood that zombie companies remain zombies.

Record low interest rates and cheap money means that struggling companies can now survive in a “zombie” state for much longer than previously was the case, thereby lowering productivity and hampering innovation. These businesses are using resources - like capital and labour - that could be used more efficiently elsewhere in the economy. Should interest rates begin to rise again at some point in the future, then these companies will likely find their access to capital markets to be much more challenging than is currently the case.

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