There has been a lot of noise about the Australian economy of late due to the federal election campaign, and most likely much of what is talked about by politicians is not worth paying much attention to. For investors the bigger and more important issues are related to if the Australian economy is in long term decline or is the economy simply heading through a short term rough patch.
As readers of my past rambles will know, I have been warning about a slowdown in the Chinese economy for a couple of years and have been bracing myself (in investment terms) for a slowdown in the Australian economy as well. I have also mentioned in the past that getting the timing right is difficult. So I admit I was a bit early when I wrote What might an Australian economic slump look like? back in 2010 although I do feel I spotted the trend correctly. (readers can be the judge of that)
The recently recycled Kevin Rudd is now Prime Minister again and he seems keen to avoid talking about the policy decisions he made which helped get the Australian economy into a bit of a tangle. But it would be wrong to blame Rudd, Gillard, and Swan etc. for the mismanagement of the economy alone as they were ably assisted by the very poor forecasting skills of Treasury and the consistent inability of the Reserve Bank of Australia (RBA) to spot any trend until it was obvious.
But credit where credit is due because Glenn Stevens and the RBA may have missed the slowdown in the Chinese economy looming, but they are making up for it now by talking about how they actually did see that coming.
However I am wandering off-topic so let me write about a few charts and put my view of what is happening forward and then let readers share their views.
First let’s look at what the Australian stock market has been doing over the last few decades.
ASX All Ordinaries Stock Market Index 1988-2013
I have posted the long term chart for the ASX All Ords (XAO) many times and pointed out how clearly you can see pre-GFC boom (or bubble) from 2003-2007. It was quite a ride.
We can also see how the Australian stock market bounced back from being oversold in 2009 but since then has not done much trend wise.
Over the last 12 months interest rate cuts have helped lift the stock market and also given home prices a boost as we will see in the next chart. My view however is that the rate cuts have done most of what they can do and that from this point forward, both the stock market and the property market will find the going a little tougher.
Now let’s have a look at Australian Dwelling Prices: 2005 – 2013.
There are many ways to read this chart and if we were to focus on the long term nationwide trend from 2005 then clearly the above chart indicates that the movement has been upwards.
But there are signs of weakness with dwelling prices in Brisbane struggling since 2009 and prices in Adelaide looking pretty flat. Meanwhile dwelling prices in Sydney, Perth and Melbourne are on the rise again so maybe that suggests property prices nationwide are about to resume their long term upwards trend?
My view at this time is that when we look at this chart again in 6-12 months we will see prices on a national level moving sideways or slipping back a touch. I will also add that over the next few years I doubt we will see a strong upward trend in national dwelling prices emerge.
When I suggested a few years ago that the home prices would slip backwards (on a national level) many people scoffed at this view. But the chart above confirms this is indeed what happened although of course there were, and still are, property hot spots where prices have continued to rise.
One reason I am cautious about Australian home prices over the next few years is because household debt levels are still fairly high as we can see from the chart below.
Australian households have been racking up debt for decades although over the last decade debt levels seem to have peaked. Certainly the Australian economy has had a very good run for quite a long time, but it’s a little worrying that household debt levels have remained high.
This suggests to me that there isn’t much scope for residential property prices to head significantly higher unless either households take on more debt, foreign buyers prop up the market or wages keep rising strongly. (assuming there isn’t a surge in cashed-up immigrants)
I don’t think any of the above are likely to happen over the next few years but I am sure plenty of others have a different opinion plus have reasons why they think dwelling prices will rise, so I encourage those people to share their views.
Another reason I see dwelling prices trending sideways or drifting lower is the fall in commodities prices. Again this is something I warned would happen some years ago at a time when the group consensus was that prices were heading onwards and upwards.
But alas as we can see from the chart below, prices have slipped back quite considerably.
Lately a few market watchers have been getting excited about the rebound in iron ore prices but I reckon this is just a blip in a market heading for some years of pain. It is quite possible and likely that we will see the RBA Index of Commodities Prices fall much lower over the next few years which in turn will put a drag on GDP growth in Australia.
Speaking of GDP growth, I have saved that chart for last and once again I will suggest that the long term tend doesn’t look pretty.
Overall the GDP growth trend since 1993 looks to be pretty much all downhill with the peaks getting lower and the dips getting deeper as well. On the plus side however there has not been a recession in Australia for decades and that certainly is impressive.
But I wonder how this chart would look if the impact of the mining boom were stripped out and how it’s going to look in a few years time.
Will we see GDP growth start to trend upwards? My guess is no, hence the reason I find it difficult to see how dwelling prices will do much else but drift sideways for a while which all things considered, would be a better outcome than the woes other property markets have experienced in Europe & the US for example.
Overall my impression is that the excellent run the Australian economy has had for decades probably came to an end sometime around 2011-2012. Since then it has entered a period of decline which may continue over the medium or long term.
I have no clear idea how severe the economic slowdown in Australia will be since much of this depends on what happens to the Chinese economy and the situation there is very unclear to say the least.
Then again it could be argued that the Australian economy has stayed out of recession during a period when most other G-20 nations have struggled. Therefore this demonstrates that the economy is robust and has been well managed.
So perhaps my reading of the charts is way off the mark? Maybe the economy is not in long term decline but rather about to regain its strength and enter another period of strong growth?
So what do you think? All views are welcome but please follow the moderation guidelines