Happy betting today, not only on the GGs but also on another interest rate cut. We will need it.
Today’s RBA decision – assuming another 0.25% fall in the cash rate; and like October’s fall – will be about boosting local business and confidence, rather than addressing any significant structural downturn.
But what is (or isn’t) happening in China is also having a major bearing on the RBA’s decision-making process.
The RBA board members, in their October minutes, conceded that the ongoing slowdown in China and lack of significant stimulus by Chinese policymakers was behind the October cuts. And if that status quo doesn’t change, then further cuts in the Australian cash rate are likely.
In short, unless China’s economic growth starts to increase – which in turn will stimulate the Australian economy – we will have to do it ourselves.
See, the RBA is looking at our economy beyond the resources boom and in one whereby local construction; retail and tourism are the major drivers. This will take more than lower interest rates. It will require a drop in the Aussie dollar and the removal of many current impediments on private business.
The outlook for Australian resource producers will depend fundamentally on what Chinese policymakers decide to do with their policy settings. And frankly, there really is very little they can do.
My view is that China’s growth of recent years is unsustainable in its current form. You cannot grow an economy without consumers. There are only so many bridges you can build to nowhere. It also helps it they stay up!
Whilst the Chinese population is large, in general most Chinese are poor and the better off do not consume much. They have an aging population; no social security and those that can, are saving for retirement or a rainy day.
Just 37% of the Chinese economy is based on consumption. This proportion needs to double before China can establish a sustainable economic growth model. And whilst China is very important to us, they represent just 5% of the world’s consumers. Yet they are ranked 4th in the world.
China now faces an economic fork-in-the-road, and regardless of which path they take, it will cover much harder terrain. Relying on China for much of our economic growth is now a very risky venture.
The RBA is right in trying to change our economic focus. Domestic drivers will become much more important. And this will have a major impact on Australia’s urban settlement patterns over the next decade or so, just like the resources boom influenced the recent past. Capital cities and multi-faceted major regional towns will grow in importance. Strongly influenced resource centres will drop away and with them most property investment opportunities. It is already starting to happen. The “mining town” mantra was never sustainable – or frankly creditable – if you ask me.
Many existing Australian businesses will need to restructure to best suit these different, and also less lucrative, business conditions.
In Queensland, this challenge will be much harder than elsewhere, as far too many private businesses – after 20 years of Queensland Labor – have grown overly reliant on government for their main source of revenue. I have heard some very influential observers call Queensland’s business community “piss-weak” and “on the Government’s teat”. And I think they are right.
As an end note, it is somewhat ironic that the key to Australia’s long-term economic outlook isn’t China, but America. It always was.
I have had many arguments over recent years – whilst at outings and especially when anti-American sentiments come to the fore – when I proclaim something like, “This century is all about America, without the Yanks the world would implode”. Most replies were very bitter, often vitriolic!
See, the world, and especially Americans, often get it wrong. In the 1970s the Soviet Union stood 10ft tall; Japan was going to crush the US in the 1980s (I still have all those useless “do business like the Japanese” books somewhere at home) and now we are doing the same with China. But America holds a third of the world’s consumers; it is the home of everything digital; it is the source of all meaningful technology; it creates, whilst China copies and mass produces – and often poorly.
The USA controls the computer industry and the world’s oceans; and most people in the world want to be like Americans. Very few want to be Chinese, Indian or even Australian. Yes, it is hard to believe!
We need America to start consuming again*. And the early signs are good with the long-battered US housing market starting to get back on its feet. Fingers crossed this time, for what happens to the US housing market is very important to our economic fortune.
* For mine, to help do so, we need a Republican in the White House, Mormon or not!
Give us the goods from the front lines – let us know what’s happening out there via twitter –@michaelmatusik #propertypulse. You’ll have about 110 words after these two handles to share your comment/property news.
Michael Matusik is the director of independent property advisory Matusik Property Insights and writes the Matusik Missive which is free, however, reprinting, republication or distribution of any portion of this material, or inclusion on any website, is strictly prohibited without the written permission of Matusik Property Insights and may incur a charge.