We know it can be confusing, but the key is being selective. Focus on the half-dozen indicators that affect your life and ignore the rest if you want.
Take an interest because this stuff affects you.
Lower interest rates mean home-loan repayments will fall and a strong Aussie dollar makes that holiday to the US you’ve dreamed of much more affordable. The same goes for economic stats. Inflation figures can give you ammunition for your annual pay review and economic growth figures will tell you whether it’s a good time to spend money or try a new business idea.
Economics isn’t rocket science, and is often made out to be more complicated than it really is. Our blood boils when we hear news reports saying interest rates rose “25 basis points” instead of simply saying “a quarter of a per cent”.
Most people understand it’s good if the economy is growing and prices aren’t rising too fast, but get confused when they hear talk of Gross Domestic Product or the Consumer Price Index. Here’s what you need to know.
The Reserve Bank uses official interest rates to control the economy and achieve steady growth. If growth is accelerating and prices are rising too far or too fast, it will raise rates so people rein in spending and the economy doesn’t overheat. If the economy takes a turn for the worse, like now, the RBA will cut rates to stimulate spending. Economists are tipping the Reserve Bank will cut rates by about half a per cent over the next year to stimulate growth in the economy and reduce the value of the Australian dollar to help exports.
Gross Domestic Product is used to measure the growth of the economy. It’s basically the value of all the goods and services we produce. GDP is released each quarter. If it rises, then the economy is growing; if it falls, the economy is contracting. The Australian economy expanded 3 per cent over the past year and is expected to slow to 2.75 per cent over the next 12 months. That’s a terrific result compared with most other developed nations.
Inflation means prices are rising and deflation means prices are falling.
The Consumer Price Index (CPI) measures changes in prices of several goods and services each quarter.
The Reserve Bank likes to see prices rise by no more than 3 per cent a year. If inflation exceeds that, the RBA is likely to raise interest rates to control spending and therefore price increases. CPI figures are expected to fall from the current 2.5 per cent to 2.25 per cent over the next year.
Each month the Australian Bureau of Statistics measures how many people have a job and how many are actively looking for work.
The unemployment rate is the percentage of the labour force that is out of work. At the moment the unemployment rate is sitting at 5.5 per cent, which is classed as very low, but the job market is weakening.
I’m sure you’ve heard the Australian dollar has been around parity with the US dollar for a while now. That means one Australian dollar buys one US dollar. The Aussie is so strong because our official interest rates are high compared with the rest of the world and commodity prices have been strong.
As a general rule, overseas investors are attracted to higher-yielding currencies because they get a better return on their investments.
Each month the Australian Bureau of Statistics releases two big sets of figures on the property market housing finance and building approvals.
Housing finance figures tell us whether people are borrowing to buy property.
This data measures the value of loans banks and other financial institutions in the nation have lent out for property purchases or construction.
Building approvals show how much building work has been approved in the past month.
Thus we learn how much confidence people have in the housing market and what kind of growth we can expect to see.
Other indicators we look at
The basics: portfolio pyramids
We had a terrific question last week asking how to build a consistent share portfolio from scratch. A well-balanced portfolio can be thought of as a pyramid. Starting from the bottom, the base needs to be made of solid stuff. This means established, cash generating businesses with a sustainable competitive advantage.
I’m talking healthcare, consumer staples, like food, beverages and other household items, and telcoms. Think CSL, Woolworths and Telstra.
These core stocks will make up the biggest portion of the pyramid, up to about 60 per cent.
Once that base is in place start building on it with growth companies; cash generating outfits with room for expansion. These stocks might make up 30-40 per cent.
Then there is room for anywhere up to 10 per cent in speculative stocks. Essentially this is money that you can afford to lose, like a lottery ticket. Of course, professional advice is important, but so is common sense.
By David and Libby Koch, news.com.au
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