Australia is headed for recession next year and nothing can be done to stop it, according to a prominent economist.
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
As 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.
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
Now 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.
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:
- 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
- Avoid the inner CBD high rise or off the plan apartments where there is an oversupply
- Look for regions of employment growth – avoid blue collar suburbs, first home buyer suburbs, regional and mining towns.
- 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.
- 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…
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