It’s a question many are asking at the moment.
What’s ahead for Australia’s economy in 2019 and beyond?
And if you’re interested in property, as I assume you are because you’re reading this blog you’d be interested in ANZ Bank’s recent report to their institutional and professional clients, because it gives a good account of what’s currently going on in our economy and contains some insightful charts.
In summary the reports authors – Felicity Emmett and David Plank – see solid economic growth ahead for the Australian economy, but explain that weak household income growth and falling house prices cloud the outlook.
A substantial pipeline of activity in public spending, business investment and exports should support above-trend growth of close to 3%.
They start their report with an interesting chart
ANZ keeps track of property related internet searches as in the past these are a 3 month leading indicator of what’s ahead for our property markets.
This is a positive sign for property as is explained together with a further chart in the middle of this report, so keep reading
Here’s the balance of the ANZ report:
The risks around the outlook have risen, particularly on the domestic front, with ongoing low wages growth and falling house prices putting a cloud over the outlook for consumer spending.
After a very strong first half, Australian economic growth slowed in Q3.
There were some one-offs which weighed on growth, and consumer spending was disappointingly weak, but we expect a bounce in activity in Q4.
We continue to forecast GDP growth to be around 3% in 2018 and 2019, a little above trend, with a modest slowdown in 2020 (Figure 1).
The public sector looks set to continue to grow strongly (Figure 2).
With a large pipeline of infrastructure projects, particularly in Sydney and Melbourne, government investment should rise further over the coming year.
Public consumption is also set to keep growing at a robust pace, with the progressive roll-out of the National Disability Insurance Scheme over the next two years.
Overall, public demand should again make a higher-than-average contribution to GDP growth.
The risks to public spending 2019-20 look to be on the upside, given the combination of a Federal Election and a better starting position for the Commonwealth Budget, which is likely to see generous election spending and/or tax cuts.
The outlook for private investment remains positive.
Recent weakness in non-mining business investment looks likely to be temporary, with firms reporting plans for a solid expansion of capex in 2019, with particular strength in non-residential construction.
Moreover, the drag from falling mining investment is close to complete.
Net exports made a solid contribution to growth in Q3, and strength is likely to continue into 2019.
LNG exports from the last of the two mega-LNG plants, Ichthys and Prelude, are coming on stream and will support growth in resources exports over the coming year, while the decline in the exchange rate will see net exports of services add to growth (Figure 4).
The key domestic concerns over the prospect for the economy are centred on the household sector.
Growth in consumer spending slowed in Q3.
While this could be a continuation of the recent saw-tooth pattern in spending, it could also reflect the impact of the current unhelpful combination of falling house prices (Figure 5) and weak household income growth (Figure 6).
Figure 5 shows the historic relationship between house prices and consumption, with our forecast for house prices over the next few years added in for good measure.
It would be wrong to infer from the chart that falling house prices are the sole or even main cause of the past slowdowns in consumption.
In each of the historical instances of falling house prices the initial trigger was tighter monetary policy, with interest rates often rising sharply.
The trigger for the current downturn in house prices is very different – a tightening in credit supply.
This has no impact on cash flows for most home owners.
So it seems reasonable that the implications for consumption will be very different.
Still, we think it is difficult to conclude that lower house prices will have no implications for spending.
At the same time we are mindful that consumer confidence is elevated.
The ANZ-Roy Morgan consumer confidence survey has confidence well above its historic average, with the sub-indices on financial conditions also above their long-run averages, which RBA research1 suggests is a better guide to household spending than the headline index.
Our forecasts factor in a moderate slowdown in consumption over the next few years.
Critically, though, we also expect a pick-up in household income growth.
Tax cuts will help in this regard, but we need to see a pick-up in wages to get a sustained acceleration in household income growth.
The combination of falling house prices and continued weak income growth would likely lead to a much weaker path for household spending than we are forecasting.
We expect wage growth to gradually move higher as the unemployment rate falls.
The leading indicators suggest a lower unemployment rate is likely (Figure 7), and we still think the law of supply and demand applies to wages (Figure 8).
Critical to this outlook is a continued upbeat assessment of their own prospects by businesses.
In this regard the level of surveyed business conditions is supportive of a positive outlook, but the recent trend raises the prospect that this may not continue to be the case for much longer (Figure 9).
Not all the risks are to the downside
In the present environment it is very easy to focus on downside risks.
The global outlook seems to be evolving in a negative way, with the trade dispute between the US and China taking some ominous turns, and growth momentum outside the US slowing.
Lower equity prices and the recent plunge in the price of oil, albeit after strong gains, are symptoms of that negative turn.
Domestically, the news on house prices seems to be getting worse and there was considerable attention on the weaker-than-expected Q3 GDP report.
We also note the somewhat ‘breathless’ reporting of a speech by the Deputy Governor in which he observed that the RBA and Government had considerable scope to ease policy if required.
Given that the speech was titled Lessons and Questions from the GFC, we would have been surprised if the Deputy Governor hadn’t talked about such things.
We very much doubt there was any intended signalling in his remarks, with Assistant Governor Christopher Kent’s comment this past week, that the speech needed to be seen in the context of a talk on the GFC, consistent with this.
There are upside risks to the outlook that we should not ignore.
One that we think is particularly important is the outlook for fiscal policy.
With a federal election due by May 2019 and the Government well behind in the polls, some election sweeteners look likely.
Government finances are in better shape than expected at the time of the 2018-19 Budget in May, and while the Government is committed to driving the budget into surplus, it would not be surprising if a substantial proportion of the additional revenue was recycled back to households.
Only a portion of this upside is factored into our numbers.
Additional fiscal stimulus could boost the outlook for 2020 in particular.
As for housing, we note that the bulk of the bad news is confined to Sydney and Melbourne.
Prices are performing much better in some of the other capital cities.
In the three months to November, prices rose in Adelaide, Canberra, Hobart and Darwin and were basically flat in Brisbane.
That may not last, of course.
Research we published last year showed that the Sydney and Melbourne housing markets have spill-over impacts on the smaller markets.
More importantly, not all the forward indicators are pointing downwards.
Sentiment about whether it is a good time to buy a dwelling seems to be on a sharply improving track, as evident in both the ANZ house search index (Figure 10) and the “time-tobuy” measure in the Westpac consumer confidence survey (Figure 11).
Both these measures have been reliable indicators of past turning points in house prices.
The unique nature of this downturn, at least in terms of the initial trigger, makes us cautious about the signal this time around.
Still, the move in these measures reminds us that price falls do improve affordability quite quickly.
A point which will be moot if housing credit is still difficult to access. But we don’t think credit conditions will tighten indefinitely.
It will be difficult to get clarity on this until the air clears on the regulatory outlook, however.
We don’t see this happening until late next year given the timing of the final report of the Royal Commission and the general election.
But it could come earlier than we expect.
The nature of the housing cycle means we need to keep an open mind about both the potential for upside as well as downside surprises.
Source: ANZ Bank’s recent report to their institutional and professional clients. This is not intended as advice as it doesn’t take into account your objectives, financial situation or needs
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