Another Hidden Fact Pointing to a Strong Oz Economy in 2018

One of my key drivers for writing each morning is to pick up on big stories relevant for the economy or the stock market that are either ignored by my mates in the media or at least treated with little respect. I do this because what makes a journalist’s day might not necessarily be important for anyone who wants to make money out of investing, building a business or becoming a top notch employee bound for promotion.

The stuff I dig up daily also has relevance for Prime Ministers, who might want to get loved and elected next year because as Bill Clinton once advised: “It’s the economy, stupid.”

It’s about competitive advantage and most people who fall into the winner’s class have a competitive advantage and really understand where the economy and markets are heading.

One absolute beauty was the recent Westpac-Melbourne Institute Leading Index, which puts together a whole lot of indicators on the economy to try and predict where the Oz economy is heading. Yep, that’s why it’s called a leading index. And this has special significance for me as I have been out of kilter with the majority of economists in tipping our economy will do better than the consensus guesses out there by Australia’s best economists.

Luckily, there’s one pretty decent economic body on my side called the Reserve Bank of Australia and the pointy-headed economists and bankers there would be happy to see the most recent reading of this index.

I reckon Malcolm Turnbull and Scott Morrison also would’ve liked what you’re about to see.

So, this leading index showed a six-month annualized growth rate reading of +1.41% in December. Now you might be asking “so what?” The number seems meaningless but you need to know the previous reading was only +0.66% in November. That’s a big jump of 113%!

Remember, the index indicates the likely pace of economic activity — growth of production of goods and services, job creation, business profits, etc. — relative to trend three to nine months into the future.

A good mate and economist, Bill Evans, who heads up the Westpac economics team has been constructing and watching this index for decades and his reaction is worth noting.

"This is a very strong above trend reading and, following the solid results in October and November, points to solid above trend growth in the early part of 2018.”

This is economist speak for: “This is a ripper number and I’m really excited about the prospects for the Oz economy!”

What’s good about this number is that it vindicates my optimism on the economy. It makes the Australian Industry Group survey that predicted over 400,000 new jobs this year believable. And it makes it very possible that this better-than-expected growth of the economy translates into better company profits and higher stocks prices.

We’re now in “confession season”, where companies admit if they’ve got unexpected bad or good news coming when reporting season happens. Happily for optimists like me, Macquarie’s Martin Lakos told me on my radio program that the negative confessions have been small, while the positive ones have been bigger in number.

This leading news came as we learnt that the Internet Vacancy Index rose by 0.2% to 83.6 in December in trend terms, after increasing by a revised 0.5% in November (previously reported +0.3%). The index has now risen for 14 consecutive months – the longest period of growth since March 2011 and has increased by 8.1% over the year to 5½-year highs!

Against that we learnt that our labour productivity for the financial year grew by 1.1% on an hours worked basis and 0.5% on a quality-adjusted worked basis in 2016-17 - the lowest annual growth in five years.

However, this is a relatively old figure going back to the 12 months ending 30 June 2017. Over that year, business investment, which raises productivity, was low and had not taken off as it has now. I expect productivity to rise this year.

One final thing is that we know we created 403,000 jobs last year and it started in the second half of 2016-17. And as you add more workers to jobs without bumping up the technology from business investment, productivity initially falls. This is a negative story that turns positive this year and gets even better in 2019.

If you don’t believe me as an economist, then believe me as a journalist!

Peter Switzer is the founder and publisher of the Switzer Report. AIA members are entitled to a free three-month subscription to the Switzer Report. Visit www.switzer.com.au/aia for your free subscription today