Tim Toohey, former chief economist at Goldman Sachs, was the #1 rated economist on the Greenwich survey for 13 years. Earlier this year he teamed up with seasoned trader Brett Gillespie at Ellerston Capital’s new Global Macro Fund. Livewire spoke with Tim about his current views on the Australian economy.
- Interest rates are at insurance levels and the RBA is getting a better picture on the outlook for national income
- There is growing confidence in the outlook for global economic growth
- Business investment is basing out with a downturn in WA masking underlying strength
- Declining housing investment will be a drag but not as much as many think
- The consumer is probably doing ‘ok’ despite some of the negative headlines
- No one wants to be ‘next to hike’ after the US, so there’s a chance a number of countries, including Australia, will lift rates together in 2018
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Edited Transcript of interview with Tim Toohey
The outlook for the Australian economy
I think the issue in Australia is that you do have a very sharp reacceleration in some of the big national income type measures of the economy. So the nominal parts of the economy are reaccelerating at the moment. If you're a wage earner you're just not feeling it yet. So the lags are quite long and a little bit elastic.
Interest rates at ‘insurance’ levels
I think from a central bankers point of view rates got to where they were as partly insurance. They didn't know how far the compression in national income was going to be. They didn't know how far the falls of investment were going to be. They didn't know how far the damage to the fiscal finances were going to be and they had a much more uncertain global environment.
So working backwards. They've got a lot more confidence in what's going on globally. In fact all throughout the G20, everyone's growing above potential and in some cases accelerating.
So global growth isn't that far away from 4% real growth again. It's just that everyone thinks that they're stuck in secular stagnation.
So global growth isn't that far away from 4% real growth again.
Business investments are basing out
In terms of the other parameters business investments quite close to basing out more broadly. If you strip Western Australia out of the national calculations the rest of the economy's growing about 3.6% real, which is well above trend.
So a lot of what you see in terms of the damage to the data, even the wages' data is a Western Australia event. What we do know with quite a lot of clarity is that Western Australia will turn quite sharply through the remainder of this year, just as the LNG volumes really kick through and it spreads down somewhat into the rest of the economy.
What we do know with quite a lot of clarity is that Western Australia will turn quite sharply through the remainder of this year.
Housing – a drag but not as bad as most are expecting
Housing, yes it will be a significant drag as we move through into '18 and into '19 but even if you put through housing contractions the size of '91 - '92 or '94 - '95 it would still leave growth on a positive trajectory, if you strip out the huge drag that we've had from business investment. So business investment just moving sideways adds a back essentially 1.5% for growth. The biggest falls in housing investment - that has ever done, for any period for economic growth in a single year is less than 1%.
If you put through housing contractions the size of '91 - '92 or '94 - '95 it would still leave growth on a positive trajectory.
Can consumers hang in?
So I think as long as the consumer can hang in there and in some ways the consumer's doing reasonably well outside of specialist retail. So I know all the headlines are on specialist retail but the consumer's doing okay.
The rest of business investment is starting to pick up. Government wants to contribute a little bit more in terms of infrastructure spend. The export side should be contributing to growth reasonably significantly.
There is a prospect that the headline GDP number here, after this quarter starts to look a little bit better.
Does the inflation pick up sufficiently is going to be the real question. Does the wages pick up sufficiently? Again the lags are long. We get the evidence of that locally, really late this year.
Does the inflation pick up sufficiently is going to be the real question.
A synchronised move higher in interest rates?
So the first phase of next year there's a range of central banks, Canada, Bank of England potentially, even the Reserve Bank of India is not that far away from thinking about hiking, which could potentially be looking to all hike simultaneously.
Does Australia fit into that basket? Potentially, if the data comes in as sufficiently robust. But I think that uniformity of that next step, no one wants to be the next cab of the rank after the Fed.
I think you'll find a lot of central banks will go simultaneously.
About the Ellerston Global Macro Fund
The Ellerston Global Macro Fund is an absolute, unconstrained strategy investing in a number of fundamentally derived core themes, optimised via trade expression and portfolio construction across Fixed Income, Foreign Exchange, Equity & Commodities. It focuses on capital preservation while providing low to negative correlation to traditional asset classes. Find out more here.
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