Your own economy isn’t hard to work out when you focus on your occupation, your income and your expenses. But when you want to make financial decisions and investments outside your normal expertise, then you’ll want to work out the broader economy and what it means for your decisions. Here are my top 10 ways to read the economy.
1. GDP: gross domestic product (GDP) is a litmus test for how strong the economy is over all. It is household consumption, plus business investment, plus government expenditure, plus the difference when you minus imports from exports. GDP growth really matters: it’s currently 3.5 per cent, above the global trend. Higher growth is expected.
2. Household consumption: household spending equals confidence, and it accounts for more than 70 per cent of GDP. It’s currently rising. Final consumption expenditure (mostly household spending) rose 0.3 in the June quarter.
3. Business investment: while mining investment is slowing this year, non-mining business investment is starting to rise, albeit from a subdued base, and business credit growth is moving upwards too. If investment continues to grow, expect employment and GDP to grow with it.
4. Government investment: currently subdued in line with below-trend economic growth.
5. Exports/imports: we had trade surpluses at the start of 2014, but we have deficits again as exports slow. Trade is determined by the growth of the Asian zone: it takes 75 per cent of our exports.
6. Unemployment: currently at 6.4 per cent, and now higher than in the US. It’s been rising since June 2011, so unemployment was going up during the resources boom. Rising business investment should create employment.
7. Inflation: while the economy is tepid, inflation – the general rise in prices of goods and services – is currently at 3 per cent, or the top of the historic 2-3 per cent range.
8. Australian dollar: it has lost ground to the US dollar since 2013, which is not a bad thing for achieving balanced growth in our GDP. It’s probably still over-valued against the US dollar.
9. Interest rates: the single most important factor in the price of housing. We currently have historically low interest rates, contributing to a stimulatory effect. Many economists say we can expect these low rates into 2015. Mortgage quality is good too: more than 30 per cent of Australian mortgage borrowers are at least 24 months ahead of their repayment schedules.
10. The RBA: makes a decision on official interest rates each month, to ensure that inflation is within the 2-3 per cent band. The low cash rate of 2.5 per cent is likely to be sustained into next year because the RBA thinks it will help economic growth.
A good resource for learning about the economy is the RBA web site, which aggregates national and global data. Use this to gain insight into factors that could affect your investments: low interest rates mean rising property prices; a growing economy usually means solid gains in the top stocks, and so on. As always, do your homework, be patient and find an advisor if you’re confused.