Should you be worried about the Australian economy, your job, your property portfolio, your future?
Well…if you follow many of the media commentators, maybe you should be.
They’re worried about our faltering property markets, low inflation and slow wage growth.
I’m not sure there’s right – I have a different view based on the fundamentals
Each month the Reserve Bank meets to discuss the state of the economy and set official interest rates and then releases its minutes to explain the reasons behind their monetary policy decision and a chart pack which I’ll try and summarise for you below.
This month there’s plenty of economic news, even though you may have missed it if you read the mainstream media.
Sure property prices are falling a little, but the world’s economy is growing and locally there’s many more of us (Australia’s population just reached 25 million) and we’re creating plenty of jobs and consumer confidence is rising.
The bottom line is that the RBA sees reasonable prospects that our economy will record good growth, the unemployment rate will come down gradually and that inflation will increase over time.
By the way…this is a favourable outlook.
If this is how things evolve, the RBA expects the next move in interest rates to be up, not down.
As the economy strengthens and income growth and inflation lift, it would be natural for interest rates to return towards more normal levels.
Remember…our current low interest rates are at stimulatory levels
The timing of any future change in interest rates will depend on the speed of the progress that is made in reducing the unemployment rate and having inflation return to around the midpoint of the target range on a sustained basis.
So.. no market crashes in sight, but let’s look at some of the RBA’s graphs and try and interpret them.
Sorry – there’s lots of information in this article – you may just want to skim through to the snapshots that give a good overview
INTERNATIONAL ECONOMIC GROWTH
As always, it’s important to start with the international context…
The global economic outlook is much more positive than it was a few years ago with global economic expansion still continuing.
A number of advanced economies are growing at an above-trend rate and unemployment rates are low.
Growth in China has slowed a little, with the authorities easing policy while continuing to pay close attention to the risks in the financial sector.
Globally, inflation remains low, although it has increased in some economies and further increases are expected given the tight labour markets.
One uncertainty regarding the global outlook stems from the direction of international trade policy in the United States.
Although world inflation generally remains low, it is heading upwards (that’s a good thing) and increasing capacity pressures in product and labour markets are expected to add to inflationary pressures in the months ahead.
We truly live in “the lucky country” – Australia’s economy has had a record run with no recession since 1991.
The RBA’s forecast for the Australian economy remains unchanged.
Economic (GDP) growth is expected to average a bit above 3 per cent in 2018 and 2019.
This should see some further reduction in spare capacity.
Business conditions are positive and non-mining business investment is continuing to increase.
Higher levels of public infrastructure investment are also supporting the economy, as is growth in resource exports.
One continuing source of uncertainty is the outlook for household consumption.
- Household income has been growing slowly and debt levels are high.
- The drought has led to difficult conditions in parts of the farm sector.
However, economic conditions continue to vary across the states.
Recently economic growth has been strongest in Victoria and New South Wales and the weakness in Western Australia is picking up.
And the RBA forecasts that our economy is set to strengthen due to increased consumer consumption and non mining business investment.
Like the rest of the world, Australia is in a low inflationary environment which is of course one of the reasons the RBA has been able keep official interest rates so low.
The latest inflation data were in line with the Bank’s expectations.
Over the past year, the CPI increased by 2.1 per cent, and in underlying terms, inflation was close to 2 per cent.
The RBA forecast is for inflation to be higher in 2019 and 2020 than it is currently.
The RBA expects underlying inflation to gradually increase in the future from just under 2% currently, to be above just above 2 %.
The forecasts reflect the expected decline in spare capacity in the economy as GDP growth picks up and as the labour market moves towards full employment.
Employment has continued to grow strongly over recent months.
Employment has increased in all states – up 2.8%
The various forward-looking indicators point to continuing solid growth in employment ahead, although the unemployment rate is expected to decline only gradually over the next couple of years.
The extra jobs we’ve created have been met by a further increase in participation rate (more people moving back into the workforce) rather than a decline in the unemployment rate, which has been around 5.5% for some months.
The RBA expects our economy to keep growing and the unemployment rate to decline gradually to around 5.25 %
But with the labour market expected to still have some spare capacity, it is unlikely for wages to grow significantly.
However, wage growth remains low.
This is likely to continue for a while yet, and this is one of the reasons I believe we will not see a rise in RBA interest rates any time soon.
However, if the stronger conditions in the labour market persist, we should see some lift in wage growth over time.
Household consumption has been growing at a faster rate than household disposable income meaning that the household saving ratio is declining.
The low growth in household disposable income continues to weigh on spending.
Growth in real household disposable income was below average over 2017 at 1.7 per cent, largely because of low wages growth.
Having said that Australian households are amongst the wealthiest in the world, with our assets (primarily in real estate) increasing in value faster than our liabilities (due to low interest rates).
Consumer sentiment, while remaining fickle and is slowly picking up – when people don’t feel confident about their jobs or their future, they don’t spend.
With a Federal Election looming it is likely consumer sentiment will remain low
OUR HOUSING MARKETS
Conditions in the property markets vary considerably around the country.
Conditions in the Sydney and Melbourne housing markets have continued to ease and borrowing by home buyers and investors is slowing – boy are the banks giving them a hard time.
And developer are slowing down – the following graph shows generally falling building approvals, as is normal at this stage of the property cycle.
Of course, down the track, fewer new dwelling being built at a time of strongly growing population will lead to the next property boom.
Housing finance and credit data
APRA is getting its way… the latest Housing Finance data shows a sharp drop in investor housing commitments.
THE BOTTOM LINE:
All in all, Australia’s economy is sound and looking a little better as we’re creating more jobs than ever.
At the same time, the world economy, while fragmented is also picking up.
In the meantime our property markets have moved to the next phase, one of lower growth in some locations and falling prices in others .
And that’s a good think as the fast pace of growth, particularly in Sydney and Melbourne was unsustainable in the context of a period of low economic growth with low inflation, low wages growth and low interest rates.
WHAT DOES THIS MEAN FOR YOU?
Clearly owning property – your own home and investment properties is the way to wealth in Australia
If you’re looking for independent advice about property 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 to sell, so their advice is unbiased.
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