The pressure for the Reserve Bank of Australia (RBA) to cut interest rates is growing after New Zealand lowered its rate for the third time this year and a prominent economist sounded a bleak warning for the Australian economy.
The Reserve Bank of New Zealand rattled markets when it announced a 25 basis point (0.25 of a percentage point) reduction to its cash rate to 2.75% as the Chinese economic turmoil and falling dairy prices weigh heavily on its economy. Dairy is the country's biggest export.
The jitters expressed by our closest neighbour come hot on the heels of comments made by Nobel laureate economist Paul Krugman that Australia may be headed into a recession along with Canada and he's urging the RBA to cut interest rates again even though our cash rate sits at a record low of 2%.
Commodity exporting countries are seen to be in trouble as China's economy slows faster than expected with New Zealand's gross domestic product (GDP) slipping to 2% from 2.5%. Many economists believe it will slow further.
This will be a worrying sign for the RBA as our economy also posted a worse-than-expected 0.2% GDP growth figure for the June quarter earlier this month and the traders are pricing in a 60% chance that the interest rate here will fall to 1.75% before the year's end.
This is why high dividend-paying stocks are likely to outperform over the short-term as lower interest rates make their robust yields look even more generous.
It's hard to ignore the big banks like National Australia Bank Ltd. (ASX: NAB) with its close to 9% yield when franking credits are included, and fund manager Perpetual Limited (ASX: PPT) with its forecast grossed-up yield of around 8.5%.
You can also find high-yielders in the defensive healthcare sector like fertility treatment group Monash IVF Group Ltd (ASX: MVF) and Sigma Pharmaceutical Limited (ASX: SIP). Sigma posted its half year results today and you can read about it here.
Naturally if Australia does slip into a recession, equities are not the place to be, although there are reasons to believe that we can escape an economic contraction.
The pleasing jobs data today showing a drop in the unemployment rate in August to 6.2% is one positive sign.
NAB's global head of research, Peter Jolly, also pointed out that things may not be as dire as some fear because of the falling Australian dollar (which is good for our economy), improvement in the non-mining sectors of our economy, and cost cutting by Australian miners to protect profits.
