The Australian economy, house prices and economic outlook
April 5th, 2011 · Greg Atkinson · 194 Comments
Back in April last year I suggested that the Australian economy was not quite as robust as most market commentators appeared to think and that it was quite possible for economic conditions to deteriorate quite markedly over the next few years. So now one year later after I wrote about a possible economic slump in Australia let’s have a look at how events have unfolded since then.
Before I start let me just remind readers that I am not a journalist. This means I provide sources or links to the material I quote from or refer to, I admit I could be wrong and I don’t try and tell you want to think – I lay out some thoughts and ask people to draw their own conclusions.
So please don’t ever think I have some unique insight into the stock market, economy or the global markets, I could be and may possibly be, a complete loon.
The article I wrote back in April 2010 about a possible economic downturn was entitled: What might an Australian economic slump look like? and this is what I will use as a base to reflect on how the economy is faring now in April 2011.
I suggested back then that the rosy economic outlook and forecast from the Government, Reserve Bank and market experts were based on the expectation that the Australian economy would continue to enjoy an environment where:
- House prices keep rising.
- Incomes keep rising.
- Inflation remains under control.
- Iron ore and coal prices continue to rise.
- The population continues to grow at records levels but the economy is able to keep creating jobs in order to keep unemployment low.
- Taxes are not raised.
- Government spending is kept in check.
- The Chinese economy continues to grow strongly.
So let’s now look briefly at each of the areas above and see how they are tracking at the moment.
Australian House/Home Prices
The Australian residential property sector has held up remarkably well over the last few years and has done much better than I expected. But with interest rates at current levels it can be a bit misleading just to look at the rise in home prices and say all is well.
What is a possible area of concern is that we could be entering a phase where house price gains will be less than inflation.
According to an article in The Australian recently RP Data senior research analyst Cameron Kusher is quoted as saying:
“When you consider that Australian inflation was 2.7 per cent in the year to December 2010, in real terms, Australian residential property values have been declining, which is a good outcome for prospective buyers”
This is based on data showing that for the 12 months to February 2010 capital city house prices rose by just 0.8%.
Maybe this is just a short term trend and home prices will post strong gains this year, but I doubt it. So it looks quite possible that Australian home prices could be about the enter a period of little or negative growth and if so, then one of the pillars that has propped up the economy is about to be removed.
It appears that wages in Australia are still generally speaking, on the rise which in turn is giving some of the folks at the Reserve Bank of Australia (RBA) heartburn.
Without getting into the reasons why wages are still edging upwards I will simply note that at the moment income levels at present don’t seem to be in a holding pattern and are still growing.
Inflation remains under control
Rising energy costs and rising wages suggest to me that the RBA would still be concerned about rising inflation. I would not go so far as to say inflation is out of control, but the so called inflation genie does appear to be out of the bottle again although I doubt the Australian Treasurer Wayne Swan will ever admit that.
But underlying inflation seems be at decade low according to this report from Reuters: Australia core inflation running at decade low so maybe all is well?
At this stage I would have to say that in my view inflation at the moment still appears under control but inflation does appear more likely to edge upwards than downwards over the next six months.
Iron ore, coal prices continue to rise
I have been expecting a short, sharp correction to hit coal and iron ore prices for quite a while but alas they still seem to be holding up very well. So at present the higher than long term average commodities prices are propping up GDP and the commodities boom appears to be still rolling along.
However I would like to point out that back in April 2010 the Baltic Dry Index was trading around the 3000 level whereas today it is trading at around half that level. This leads me to believe that a commodities correction might not be that far away.
Growing population/low unemployment
The growth in Australia’s population has slowed over the last 12 months mainly due to lower immigration as a result of some Visa changes made by the Government. It’s hard to say if this will have a long term impact on population growth or not so at the moment I simply look as this as a short term trend.
All I think we can conclude at present is that the unemployment rate is still relatively low at just under 5% and Australia’s population is still rising enough to stimulate demand.
Taxes are not raised
I believe it’s only a matter of time before a whole range of tax increases will start to be rolled out either directly or indirectly such as the Mining Tax and Carbon Tax.
In addition State Governments have been creeping up public transport fares and levies for some time, so slowly the tax burden on individualise and businesses is on the rise.
So it appears to me that taxes will be raised and this is likely to have a negative knock-on effect into areas such as consumer spending and home prices.
Government spending is kept in check
Need I write anything here? Does anyone seriously believe the Federal Government has spending under control? Government debt continues to rise, the NBN budget grows each hour and funds seem to be so scarce that a levy has to be raised to help fund the rebuilding in Queensland after the recent severe floods.
The Chinese economy continues to grow strongly
At present the economy in China still appears to be expanding quickly but it also becoming fairly clear that this growth is slowing.
Recently in an article in the China Daily Barry Eichengreen made the following observation:
“….a significant slowdown in Chinese growth appears imminent. The question is whether the world is ready, and whether other countries following in China’s footsteps will step up and provide the world with the economic dynamism for which we have come to depend on the People’s Republic.”
(Source: A slowing Chinese economy?)
When it comes to China you can either pretend all is well and that nothing will slow the growth of the world’s latest economic miracle or you can accept that like all other fast growing economies, China will run into some pretty serious speed bumps sooner rather than later.
I tend to agree with Barry Eichengreen and reckon that the Chinese economy is due for a major slowdown. If that happens, then I have little doubt that the Australian economy will be dragged down as well.
So putting all the pieces together I would say this – that the Australian economy is closer to entering a period of economic downturn than it is to entering a period of strong economic growth. I also doubt that in April next year I will be writing about a booming Australian economy or surging Australian stock market.
But it’s also quite possible I am looking at the economic data in the wrong way and misreading short term trends as long term ones. So I welcome as always any dissenting views or comments.