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Australia is headed for recession in 2015 and nothing can stop it!

Australia is headed for recession next year and nothing can be done to stop it, according to a prominent economist.

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Now that’s a bold call, so when I saw this headline I had to read on.

To be honest I don’t agree with the conclusion, and I’ll explain why in a moment, but  nevertheless Yahoo Finance report  Saxo Bank chief economist Steen Jakobsen saying the mining boom has bred complacency over the past decade and it’s now too late to avoid a recession in 2015.

“It’s too late, the wheels are in motion,”

Some good may come from it

Mr Jakobsen said the recession will create a sense of urgency that could lead to simplification of taxes and regulation, and shift the political agenda away from big miners and banks to small to medium-sized business.

“How you deal with low growth, low inflation and a negative environment is what will define Australia over the next two to three years,”

As the mining investment boom has slowed, the only sector to step up and take its place has been housing, which has created a housing bubble, Mr Jakobsen said.

Interest Rates will fall

Interest Rates will fallAs the Reserve Bank now has the difficult task of stimulating the economy while reining in the housing bubble, Jakobsen believes it will probably need to cut the cash rate to two per cent, but possibly as low as 1.5 per cent, as a result.

The RBA will also need to make changes to regulations on lending in order to control the housing sector, Mr Jakobsen said.

Australia has placed too much focus on the housing market, and policies allowing people to invest in property using their superannuation were “very wrong”, he said.

“The intention was to create a diversified portfolio but when society becomes so lopsided, as it is in Australia now with dwellings being the biggest growth factor in the economy – you have to think ahead, you cannot continue just to build houses, you need productivity to go with it.”

“If you compare Australia to other countries, that’s why it’s standing still, because the industries you have are all very low productivity-driven ones.”

What should be done?

He points to the Australian share market, which is dominated by financial companies and features a tiny information technology sector.

“The problem is that all the financial support, all the political support, goes to the financial sector and the mining sector and that leaves aside the growth engine which is the small and medium-sized enterprises.”

Mr Jakobsen says the key is “education, education, education”, turning Australia into a research based economy and developing the information technology sector.

“I’m very optimistic on Australia, I just think the complacency and the inability to move the agenda forward has been stopping the changes,”

“But I think this crisis point, which I believe comes early in 2015, is going to kickstart a lot of positive processes.”

Now here’s a different view..

Also in  Yahoo Finance  Peter Switzer gives his views on the economy. He thinks 2014 was a year of missed economic opportunities, with our economy affected by the slow general world economic conditions.

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Over the year consumer confidence has slipped, in part because we had a Government determined to fix the budget deficit and debt problems as early as possible, which hurt the growth of the economy but this is slowly rising again and at the same time business confidence has picked up over the year.

Switzer reminds us that the real bright spot for the economy has been the housing sector where property3 prices are up 8.9 per cent over the year.

Meanwhile, our super funds have gone up by about 12 per cent, and the S&P/ASX 200 index is up about 8 per cent if you include dividends. Over the financial year, the gain was closer to 17 per cent.

On the good news line, home sales were up 10 per cent over 2013-14, but jumped 8.4 per cent in the June quarter, which was the best reading in a year.

Meanwhile dwelling starts in the year to June were over 180,000, which was the best result in 19 years!

So what’s really in store for our economy in 2015

So what's really in store for our economy in 2015Now I’m not an economist and therefore not really qualified to forecast the future, but I’ve been a student of economics and how it relates to our property markets for many, many years and on balance I’m optimistic for 2015.

The official view from the Reserve Bank allows for growth to be 2.5 per cent to 3.5 per cent!

In other words the Big Bank thinks that next year’s growth will be better than 2014’s 2.5 per cent.

Even better, the mid-2016 forecast suggests our growth could get as high as 4.25 per cent! Just to remind you…our economy must grow by more than 3 per cent to reduce unemployment.

This is a very different view from Jakobsen, who predicts we could have a recession, and is backed by the fact that consumer and business confidence is rising, interest rates and inflation are likely to remain low, more new jobs are being advertised and the “wealth effect” is likely to kick in.

You see…many Australians, especially those who live in Sydney and Melbourne, feel wealthier because the value of their biggest asset – their home – has increase 10 or even 20 per cent over the last few years.

This “wealth effect” will give them confidence to spend more and help make the economy go round. Sure there will be stumbling blocks along the way for our economy, but the RBA still has the ability to cut rates further to encourage economic growth if needed.

More good news:

While the latest Westpac/Melbourne Institute Leading Index (which indicates the likely pace of economic activity three to nine months into the future) also suggests economic growth will remain below trend into the first half of 2015, however it did pick up in October, suggesting the economy could be headed for greener pastures during the June quarter,.

Westpac chief economist Bill Evans said:

“Overall, we expect Australia’s growth rate in 2015 to reach an above trend 3.2 per cent despite a larger drag from mining investment,” 

“Westpac expects that, with improving growth momentum in consumer spending; non-mining business investment; and the labour market, the next move in rates will be a tightening, but not until the second half of 2015, with August currently appearing to be the date for the first move.”

So what does this mean for property investors?

While Australia’s economy is likely to improve next year, rather than have a recession, we don’t operate in a vacuum.

We are part of a global economy; one that is still having lots of problems. If history repeats itself there will be plenty more surprises ahead – maybe even some shocks – and these may have a negative impact on the Australian markets. 

But it is worth remembering that the fundamentals for our economy in general and our property markets in particular are sound.Property investors

We  have a relatively strong economy, lowish interest rates and a growing population and while we’re building too many inner city high rise apartments, at the same time we are not building the right type of properties in the right areas to meet this growing demand.

However the recent rates of growth of certain sectors of our property markets, especially in some segments of Melbourne and Sydney, is unsustainable.

I see a little slower growth next year in our two big capital cities – in fact it would be good if they took a little breather.

This is normal. Property prices don’t increase in a straight line.

They go up in little booms then catch their breath and sometimes even drop a bit, but then they move up again.

But remember there is not one property market  – and currently our various markets are more fragmented than ever with only certain segments, even in booming Sydney and Melbourne, performing strongly.

It has a lot to do with demographics and supply and demand. This means next year strategic property selection will be more important than ever:

  1. Invest in the big capital cities where economic and population growth will drive demand – especially Sydney and Melbourne  (the 2 economic power houses) and Brisbane
  2. Avoid the inner CBD  high rise or off the plan apartments where there is an oversupply
  3. Look for regions of employment growth – avoid blue collar suburbs, first home buyer suburbs, regional and mining towns.
  4. Buy in suburbs where the local demographic can afford to and are prepared to buy properties pushing up values – areas where disposable income is secure and rising.
  5. Buy the type of property that will be in strong demand by owner occupiers as they buy with their hearts and not their calculators pushing up property prices.

HERE’S WHAT YOU CAN DO ABOUT THIS…

Property investment adviceIf you’re looking for independent property investment advice to help you become financially independent, no one can help you quite like the independent property investment strategists at Metropole.

Remember the multi award winning team of property investment strategists at Metropole have no properties on the market to sell, so their advice is unbiased.

Whether you are a beginner or a seasoned property investor, we would love to help you formulate an investment strategy or do a review of your existing portfolio, and help you take your property investment to the next level. Please click here to organise a time for a chat. Or call us on 1300 20 30 30.

When you attend our offices in Melbourne, Sydney or Brisbane you will receive a free copy of my latest 2 x DVD program Building Wealth through Property Investment in the new Economy valued at $49.



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Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


'Australia is headed for recession in 2015 and nothing can stop it!' have 9 comments

  1. Avatar for Property Update

    November 24, 2014 @ 12:28 pm Geoff

    Hi Michael
    Allows enjoy your comments and think your advice re next year strategic property selection is wise – however I am concerned that the “inner/middle” ring prices in Sydney and Melbourne are distorting the overall price rise average – I have just had my 10 properties valued – they are in Sydney (west) Melbourne (north) Brisbane (middle ring) and Canberra (houses and units) and EVERY ONE HAS LOST VALUE in the past 12 months – some (especially Canberra – very volatile market at the moment – avoid if possible – especially units – oversupply!!) have dropped below the price I purchased them some 3-6 years ago!! Maybe as you say I don’t have the “right type of properties in the right areas” but it points to a somewhat distorted picture of the property market – maybe it’s as you say “Property prices don’t increase in a straight line. They go up in little booms then catch their breath and sometimes even drop a bit, but then they move up again.” My main concern is the political deadlock in the Senate stopping the inevitable pain we must all share to get the budget back in shape before we can get confidence back in the market and economy.

    Reply

    • Avatar for Property Update

      November 24, 2014 @ 2:48 pm Michael Yardney

      Geoff, thanks for your comments
      I’m sorry to hear your properties have not grown and that you’ve missed out in the current strong markets. As you’ve heard me say less that 5% of properties are investment grade – in fact about 1% are – that why we don’t buy in many of the locations you mentioned – Sydney’s west, Melbourne’s north and Canberra.

      Strategic property selection is critical to investment performance

      Reply

  2. Avatar for Property Update

    November 30, 2014 @ 2:15 am Mel Smith

    An interesting article, Michael! And highlights how many economic commentators will have completely opposing views, even when viewing the same kind of data. Glass is half empty, or half full? 😉

    From personal experience, I don’t necessarily see a “recession” looming, but nor do I see massive business or consumer confidence. One point not noted here is that while many people may feel the “wealth effect” created by strong housing figures – they are not really “spending” that wealth to stimulate the economy, as would be expected. They are largely paying off debt, which has the bank’s shuffling cash around & has retailers rather nervous.

    Business overall is still shedding more jobs than creating new full time positions, which doesn’t give a huge feeling of security to many people. Youth unemployment is through the roof. Not to the 40-60% levels as seen in Europe & other areas, but still hovering around the 20% mark in far too many areas here, particularly in regional parts of the country.

    Successive governments have also added to the “brain drain” in Australia, by placing too little significance on (& investment into) new technologies, SME’s & start ups that could help pave the way for new economic growth. The fixation with mining has lead to closing the door to many other ideas that have often had to find their feet overseas & is a loss to Australia’s future development. We don’t even have a Minister for Science now within the government, which shows how short-sighted our so-called leaders have become, as the rest of the world is still moving ahead with new technologies, even under the strain of the post-GFC era!

    We need to become the innovators all over again, rather than doggedly holding onto past economic ideals & thinking that is the way the future will play out. New ideas, new investments, new opportunities for expansion. The Green-Boom demonstrated how quickly we can adapt & build new business, employment & confidence. Now that has been stripped bare under current political wrangling & opinion, shattering tens of thousands of people that HAD the confidence to build something new. Thanks to dinosaur ideology – unemployment & uncertainty now dominates what was becoming a major growth industry in this country.

    It would also be nice to see our rule-makers actually grow-a-set, to ensure that our real estate & agricultural interests are not swallowed up by foreign “investment” (outright ownership), via dodgy deals that are currently not heavily scrutinised, nor well documented. Aussies are now pretty peeved that housing prices have been getting pushed beyond their reach, artificially in many cases to help secure visa deals under current foreign investment arrangements… Talk is cheap & so is the price on our country, with certain free-trade arrangements that could seriously hamper industries & employment here.

    ALL of these items are linked in the end, to what the Australian people are perceiving their individual futures may be. While it may not be recession material, it is still far from overwhelmingly confident & there is a lot of communal anger now being missed by our “leaders”…

    Cheers, Mel

    Reply

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      November 30, 2014 @ 7:46 am Michael Yardney

      Thanks for the comment Mel – some insightful thoughts

      Reply

  3. Avatar for Property Update

    January 7, 2015 @ 10:32 am John

    Very optimistic. Crashing oil prices are very bad news. It’s not to do with over supply as we are told but rather affordability and credit versus debt limits. Economies are contracting. There are limits to growth (do we really thing economies and populations can simply keep growing???). 2015 is the beginning of the downwards deflationary death spiral. aka collapse. Recession, depression, great depression etc. All highly euphemistic terms that imply this has a temporary nature and things will bounce back. Nope. They won’t. This is the game changer.

    Reply

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      January 7, 2015 @ 4:54 pm Michael Yardney

      Thanks for your comment John.
      I hope your’e wrong – we’ll see!

      Reply

  4. Avatar for Property Update

    January 15, 2015 @ 9:31 pm chrisY

    I am willing to agree with Jakobsen’s broad observations, but his pet solution, education, is plainly silly. Which industrialists are calling for more graduate? The key to diversification of the economy is investment in productive enterprises, and there is no evidence that a shortage of educated and/or trained recruits is holding them back. A moment’s reflection would demonstrate the fallacy in Jakobsen’s argument. The whole world is a source of educated people. About a third of engineers in Australia- maybe more- were born overseas, for instance. I know of well-qualified engineers and IT careerists who are looking for work overseas, because the employment rewards and overall career prospects there are better. Nothing new about that. So what is he talking about? Is this another call for a boost in MBA production? I wonder is we have too many economists.

    Reply

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      January 16, 2015 @ 12:18 am Michael Yardney

      Chris
      I’m sure you’re correct in that we have a wealth of “well educated” people in Australia. But what are they educated for? What can they achieve with their degrees and where will those qualifications get them?

      Reply

  5. Avatar for Property Update

    May 3, 2015 @ 11:46 pm Brendan

    I too agree with Jakobsen that we are on the brink of recession , i believe it to be one brought on by a foolhardy population that is too easily led by journalist’s and popular opinion. The media had more to do with the current government coming to power than any other factor led by irrelevant unsubstantiated opinion. Opinions that have staved off any possible recovery from the few industries that support local industrial productivity and stripped their funding at same time making sure of their collapse. If we only had a more educated population that can critically reflect the very bias media we have we could have avoided electing such an incompetent government we now have. It alarms me that such limited views are so transfixed on wealth and particularly their own wealth created by finance and housing industries are allowed to become so prominently presented. This very prevalent opinion is another sign that we are headed towards recession if history of property bubbles are investigated.Property growth needs to be organic ,supported by incomes not overseas investment. Paul Keating was remembered for the last recession we had to have , well Tony Abbott and his gang have been talking up recessionary terms and cutting supply to industries that have been here for a century and new ones . I am sure he will be remembered for whole lot more if we can recover from the huge losses we face without industries to fuel our economy with employment he has deleted. The mining sector even in boom times only supported a very limited employment base. It was right to tax it more for the low contributions it made in comparison to the massive profits made from Australian resources it got cheaply. Education , particularly R&D was under Gillard and Rudd government showing very positive signs with industry prepared to invest in Australia as a manufacturing base at the big business end and the SME.
    It is the SME funding particularly that was showing growth that was unheard of in Australia with R&D linked to commercialization and manufacturing. I don’t know if it is too late to recover these investment but i think the horse has bolted and talking about Bolt i think his column needs to be shoved up his proverbial for the damage it has done.Tell me what you think Micheal have you got a captain call.

    Reply


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