At Lunch with Frank Gelber

The Lester Group recently hosted a boardroom lunch at Wildflower restaurant to hear, Frank Gelber, BIS Oxford Economics (formerly BIS Shrapnel) Chief Economist and Director provide his insights into the local and global economies, here is a brief summary of what Frank had to say:

Generally Frank was pretty down-beat, some would say negative, about Australia’s economic performance in the years ahead and pretty soft on investment returns as a result.  BIS Oxford Economics are forecasting Australia’s GDP to grow at an average of 2.5% over the next three years, with no reductions in interest rates and no material increases in interest rates either, for the next three years.  Frank foresees a long slow structural change towards the industries that suffered the most during the resources boom, industries that were heavily affected by the strong A$ at the time, namely, tourism and education initially and then agriculture, finance, business services and finally manufacturing.  To really see these dollar-exposed industries stimulated, the A$ needed to fall to a range of $0.61 - $0.72.  Clearly, with the A$ today above $0.76, growth and the speed of the recovery is impeded.

If all this wasn’t bad enough, when he broke it down to WA’s performance, we were all ready to slash our wrists!  The mining boom had been very narrow, primarily the iron ore and gas sectors, and moderated in the usual way with supply catching up to, and surpassing  demand.  He highlighted that, even now,  mining construction and investment was 75% of its way to the bottom of the cycle, so still a meaningful contraction in this sector to come.  The current level of commodity prices, being relatively high, is a temporary phenomena and will moderate.  Currently, if we take out the high levels of mining production and commodity prices, WA’s growth would be negative.  I can’t say this surprised any of us.  It was clear he saw subdued economic activity in WA, saying it would remain so for the next 5 or 6 years!  This, together with falling infrastructure spending and low wages growth, demand is weak and it just doesn’t make sense to invest in WA at the moment.

It was clear he saw stronger interest rates around the world, led by the US’s 2 to 3 increases this year.  Although, with inflation under control the RBA would not increase the cash rate until growth strengthens, market rates have increased and will continue to do so, again, led by the US.

Surprisingly , little was said on Trump, other than to say he was an unknown quantity, causing uncertainty, increasing investment and business risk.

So like it or not, we’ve got to get used to it.  Stronger growth will only emerge next decade.  And just when we thought he was going to throw us a bone, by saying we can expect good investment returns, the punchline, ‘just, they would be lower than what they were’!  With rising market interest rates, yields and prices would fall, lower total returns for all.

At least the food, venue and company made up for Franks’ dour outlook!