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Has the Australian Economy entered a period of long term decline?

August 13th, 2013 · Greg Atkinson · 22 Comments

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

asx_all_ords_20_year_chart_aug_13

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.

 

dwelling_prices_aug_13

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.

 

household_fin_aug_13

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.

 

rbaicp_aug_13

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.

 

australia_gdp_aug_13

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

Greg Atkinson is the editor of Shareswatch Australia and Managing Director of Ohori Capital. He currently works & resides in Japan. He can be followed on twitter via @GregAtkinson_jp


22 responses so far ↓

  • 1 Stillgotshoeson // Aug 16, 2013 at 9:38 am

    My views have not changed, I think we are in for a sharp fall in the ASX and a period of pain before the Australian economy gathers up a new head of steam.

    I have always had a belief in the Australian economy prosper quite well again after a (relative) short period of not so good times.

    A falling dollar, wage rise restraint (and even falls) will impact short term living standards and limit the growth in house prices (some areas still likely to go backwards) but these will all be building blocks for more propsperous times at the other end of the crisis.

    2009/2014 Will be looked back on as good times for some and terrible for others but I have faith that after this we will do well. Until the next time.. Boom/Bust is a cycle

  • 2 Greg Atkinson // Aug 16, 2013 at 10:59 am

    Stillgotshoeson I wonder how well Australia is going to be able to compete over the next decade if the TPP is signed?

    Commodities exports (soft & hard) will probably do well but other sectors are likely to suffer especially manufacturing and some areas in the services sector.

    Could we see another period similar to the early 1990’s?

  • 3 Stillgotshoeson // Aug 16, 2013 at 2:03 pm

    I see some correlation Greg. ’87 was the crash and 4 years
    later we were in recession. A couple of years of bad times
    and then boom times. I similar things happening. Maybe not exact time wise ( different response)

    Higher interest rates to come (courtesy of bond market)
    Some pain and then hopefully good times again.

  • 4 Richard // Aug 16, 2013 at 4:34 pm

    Greg, Do you think we are in for another heavy correction over the next month or so, similar to June ? Or do you think the market is more likely to set a base at this level and move higher from here ?

    I am wondering to buy back into the market or wait ?

    I know its guess work and won’t hold you to it, but what is your guess ?

  • 5 Greg Atkinson // Aug 16, 2013 at 5:08 pm

    Richard I expect the market to fall further from here and test 4800 over the short term (i.e. months) We may also see the All Ords/ASX 200 test 4400 when the markets start paying attention to realistic economic data out of China rather than rallying on rumours, policy announcements & “official” data.

    Personally I am waiting until the market dips again unless I spot something that interests me.

    Generally speaking (and as I mentioned a while back) when the market is up above 5000 I am more inclined to be in take profits mode; when it’s below 4800 then I am more inclined to be looking to buy.

    But please remember this is just my guess and not investment advice.

    You can also read more about the approach I am taking to investing in stocks at the moment in: A mixed market outlook and long term investing

    Hope that helps.

  • 6 Richard // Aug 16, 2013 at 5:42 pm

    Thanks Greg.

  • 7 Greg Atkinson // Aug 17, 2013 at 9:24 am

    Regarding my comment about “official” Chinese data here is an extract of an article which appeared on-line today on CNBC:

    “China may be exaggerating the size of its economy to the tune of $1 trillion by releasing “willfully fraudulent” inflation and GDP [gross domestic product] data, according to a study out this week.”

    “There is strong evidence indicating that the rate of real Chinese GDP growth, and ultimately total real GDP, may be significantly over stated,” said Christopher Balding, associate professor at Peking University’s HSBC Business School, and the report’s author.

    Source: Dodgy data may add $1 trillion to Chinese economy: Report

  • 8 revo3010 // Aug 26, 2013 at 9:07 am

    Hi Greg,

    Thanks for your informative and fairly accurate forecasts on the Aus stockmarket/economy. One chart that that I have found very useful is the one that shows the long term trend line on the all ords. The latest one you posted in May 2013. Would it be possible if you could post this chart monthly as this would gives us a good indication of the current state of the all ords.

    Regards

  • 9 Greg Atkinson // Aug 28, 2013 at 9:42 am

    Thanks revo. I will post the chart on a fairly regular basis but maybe not monthly since the market has often just moved sideways since late 2009.

  • 10 Ned S // Aug 30, 2013 at 4:51 am

    Geez – You’re sounding even more bearish than me Greg! And I’ve been pretty damn bearish for a pretty long time. Hmmm – Where’s Biker? Did he finally overstep the mark or some such?

  • 11 Greg Atkinson // Aug 30, 2013 at 9:45 am

    I’m not so much bearish but rather I am suggesting that growth my be lower during the post mining boom/bull phase. This differs from those who believe that other areas of the economy will take up the slack or that the commodities boom is just having a rest.

  • 12 Brad // Aug 30, 2013 at 7:49 pm

    Im no economist, i just pick things up here and there, an average citizen if you will.
    I think Aus is going to hell in a handbasket, once the mining boom slows right down, Aus will hit the ground hard.
    Its not like the times of past anymore where Australia could be raped for its riches and sectors had been undiscovered.
    I think its actually going to be a lot worse than most think with a long period of pain, rising unemployment and a massive housing downturn. I think we will see the GFC but in 5 or so years.
    I think the Howard period of unrestrained growth and the Labour period of unsustainable spending has put this country in a bad position.
    What do you think?

  • 13 revo3010 // Aug 31, 2013 at 8:16 pm

    Thanks for the reply Greg. I am more than happy for you to post the chart at the times you feel are appropriate.

    Regards
    Revo

  • 14 Greg Atkinson // Sep 6, 2013 at 11:50 am

    Brad I believe it mostly comes down to commodities which in turn means it mostly comes down to China since China the top consumer of many of these.

    There will always be demand for commodities like iron ore, coal, copper etc. of course but at what price?

    The problem as I see it is the Australian economy has adjusted itself to dealing with record exports and record prices. If that trend continues then my ramblings about the economy being unbalanced will not be valid and those who reckon there is little to worry about will be proven right.

    But I have a hard time accepting that for some reason:

    a) The Chinese economy will continue to expand above 7% for decades.

    b) Commodities (more specifically hard commodities) will not go through a cycle where prices are depressed for many years.

    I believe the Chinese economy in many sectors is in “bubble territory”. These bubbles may not all pop at once but some like the shipbuilding sector have already popped and I find it hard to believe that this is the only sector which will run into serious trouble.

  • 15 Matthew // Sep 9, 2013 at 5:19 pm

    Greg I am still not convinced that China is going to fall apart, in fact having just spent a fortnight there I think that there is a sustainable growth level ahead. Our Chinese contacts tell us of increased lending regulations around homeownership for example in a bid to curb property prices, but that is really just prudent management and a sign of fiscal maturity that some would argue is overdue. However there were articles daily about increasing house prices and pent up demand, so the underlying need appears to still outstrip the calming mechanism.

    There are a number of factors that will spur Chinese growth, not least of which is their own desires to expand the standard of living for all people, and an emerging powerhouse of a middle class. I have never seen so many Audis, Porches, BMW’s or Mercedes vehicles as I witnessed on the roads of Shanghai, Beijing or Tianjin on this visit. Wages for staff are growing at (by our peoples admission) 10% per annum and factory staff earning just RMB120 – RMB140 per day (around A$23) are becoming more selective and demanding competition for their services.

    We spent 4 days in a city that has just opened their first 5 star hotel and has a population of around 1m people. Their government is moving purposely toward a stronger industrial base from agricultural and their population is increasing around 10% per annum as people move their for better opportunities.

    As Marius Kloppers said at a breakfast I covered in your since closed thread, as China moves from construction to consumerism their demands will change, but not necessarily their reliance on Australia. So while they will always need our iron ore at some price, they will have a higher demand for materials such as copper and nickel. In real terms our export value to China could be set for a sharp increase as this demand shift materialises.

    Basically what I believe this means is that there is enough there to sustain our current economic position into the foreseeable future, if not improve it markedly.

    Then the long awaited change of government should / could see a balancing or stabilising of consumer sentiment within our borders which would should see improved internal growth rates.

    I read somewhere that the impact of the record low interest rates is not seeing any improvements in economic activity because homeowners are using the advantage to reduce debt, while cash invested retirees suffer a reduction in disposable income. This is because people like myself believe that while things are indeed uncertain it is prudent to reduce debt for a rainy day rather than spend unnecessarily and accordingly things like retail numbers suffer.

    My real belief is that we are in for a period of below average growth, followed by a period of above average growth as global conditions improve. But I cant see a massive fall in our future

  • 16 Stillgotshoeson // Sep 9, 2013 at 8:28 pm

    “My real belief is that we are in for a period of below average growth, followed by a period of above average growth as global conditions improve. But I cant see a massive fall in our future”

    We are not that far apart on ultimate destination or even path taken. How much an impact we suffer in the interim is a differing point of view. Markets tend to over react up and down and I think they will over react to the downside in the short to medium term before heading back up for a new found period of “good times”

    “Wages for staff are growing at (by our peoples admission) 10% per annum and factory staff earning just RMB120 — RMB140 per day (around A$23) are becoming more selective and demanding competition for their services. ”

    I raised this some time ago in an earlier thread. Wage rises have been quite profound, so much so that some companies are actually relocating back to the USofA to restart production there again, either in the low wage, non union controlled sourthern states or economically hit areas that workers are willing to work for lower rates than they originally received (Chicago a good example)

    If wage rises continue at this rate, a new cheaper source of labour in another country will be sourced.

    The high personal debt levels that are being paid down is still creating a lack lustre retail environment adding pressure to unemployment figures here in Aus. Major engineering projects winding down also means there is no catalyst for any sort of influential news to kick start any sort of boom in the short to medium term.

  • 17 Matthew // Sep 10, 2013 at 4:04 pm

    “I raised this some time ago in an earlier thread. Wage rises have been quite profound, so much so that some companies are actually relocating back to the USofA to restart production there again, either in the low wage, non union controlled sourthern states or economically hit areas that workers are willing to work for lower rates than they originally received”

    With RMB120 per day being around US$1.70 per hour, I am not convinced I would trust the work quality of an American assembly line worker willing to work at that hourly rate. It amounts to US$5,304 per annum assuming they work 60 hours a week for 52 straight weeks…..

    The owner of a component factory we visited in Beijing bemoaned the need to feed his staff lunch in return for working 12 hours a day, 6 days a week at the “high” wage of RMB140 per day fixed. With around 160 staff on that rate I can assure you that labour was not his most significant cost of production (at around A$4,300 per day total) in his US$25m+ operation…..

  • 18 Stillgotshoeson // Sep 10, 2013 at 8:49 pm

    Wages are not just the equation though. Lead times, rework, failed orders, total diregard for copyright are among other issues that manufacturers face. So much so that some actually are questioning keeping full business in China. Quick wage rises have been part of the problem, but by no means all of it. Some companies are already looking at other countries to move manufacturing to.

    I know of one company that recently purchased a machine from Germany with a caveat on the sale that they could not set the machine up in their Chinese based manufacturing business. Here, NZ. USA or Japan was fine but not China as they feared China would copy the technology.

  • 19 Matthew // Sep 10, 2013 at 9:14 pm

    “Wages are not just the equation though. Lead times, rework, failed orders, total diregard for copyright are among other issues ”

    Absolutely no doubt. But how is that different to Australia? Our country has a vast majority of companies who pretend their capability extends above their reality, over promise and under deliver. And those people are quickly found out. I mean this very site has a guy who pretends to be spread thinner than Eddie “Anywhere” McGuire and be an expert on all things property when the reality is he probably has never left WA.

    Good companies do their due dilligance priort to engaging new suppliers and those good companies are not exposed to the issues you raise as they invest in the quality of their product. Before we add a factory to production we run a 2 year program of sample and trial orders to ensure no disruption and an extensive audit program. I am in China personally up to 6 times a year and within our team every single batch of product we import is quality tested to our standards, and to Australian standards. We can not afford to import a faulty product because in the absence of a follow up order closely behind we can not fill demand without continuity of supply. As a diverse business group this extends to all brands.

    The thing that gets me, and I am not asserting that this applies to you Shoes because I do not know your background, is the number of people who have never been to China, or who spend a day or two in Shanghai or Beijing, who think they know what is happening in the entire country off the back of what they read in the paper while sitting on the 54th floor of a hotel in the CBD.

    I prefer to base my assumptions on actual business dealings and discussions with a diverse range of people over there and it is these discussions that has led me to my conclusions.

  • 20 Stillgotshoeson // Sep 10, 2013 at 10:41 pm

    We have lost jobs to China because we are too expensive many times. Many times we have also been called in to rectify quality issues on those very same Chinese made pieces of equipment.

    We have also regained some lost business due to multiple issues from Chinese based suppliers.
    Like here I suppose, quality can vary from company to company on similiar product.

    We have a manufacturing facility just out of Shanghai, I have been to it twice and was nearly sent there on a 2 year contract. I have some understanding and more than anecdotal evidence of issues that other companies have faced, talking and meeting with people from other companies. A recent one was a company that purchased vacuum sealing equipment, the “prototype” worked well. The delivered machines, not so well.

    When things are all good, then the country of origin is not an issue. It becomes an issue very quickly when there are issues, or multiple issues.

  • 21 Matthew // Sep 10, 2013 at 11:09 pm

    Shoes, reading your last post with the absolute greatest level of respect either your company have a very complex product and supply chain,or very poor corporate governance and supply chain management because I have never suffered your issues in all my years importing from Asian nations not only China.

  • 22 Greg Atkinson // Sep 11, 2013 at 9:52 am

    All I can say for certain is that Japanese companies are actively looking to lessen their dependence on China as a production base for a whole range of reasons and this will have an impact on the Chinese economy since Japan is one of the largest sources of FDI into China. Higher labour costs in China are also having some impact and it’s pretty common knowledge that US/EU/JP companies are looking towards places like Vietnam and more recently Myanmar which have a lower production cost base.

    Technology also plays a role in driving change. For example I have been reading that 3D printing technology may result in many companies keeping production closer to home. In the future robotics I believe will also drive change more..i.e. you don’t pay robots so where you locate a facility that uses robots for manufacturing will not be primarily driven by labour costs. (again from what I understand the trend is likely to be to keep them closer to home if possible)

    The Chinese economy may of course keep growing at more than 7% for the next decade…who can really say for sure how it will fare over the next few years? But I believe in economic cycles not economic miracles and the chances are high that a bust will follow a boom. Frenzied building activity is not always an indication of a balanced and healthy economy…quite often the opposite is true.

    Finally it seems to me that a lot of people have forgotten about the boom & bust cycle the Asian Tiger economies went through. How quickly we forget.

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