“We’ll be right”

“We’ll be Right” – Australia’s Economy has shrugged off financial crises for quarter of a century

Firstly, as an update the RBA continued to keep the official cash rate at an all-time low of 1.5% at its April meeting, which it has done since last August.

The interesting development since my last newsletter is that all the banks have raised both variable and fixed interest rates regardless of the RBA rate policy.

I certainly hope our readers have benefitted from my timely warnings about this outcome.
Now to the interesting topic of one of the longest periods of economic expansion in the modern era.
The measure being used here to define a recession is two consecutive quarters of economic contraction and the last time that occurred in Australia was in 1991.
The current economic growth record is held by the Netherlands and lasted from the fourth quarter of 1980 to the second quarter of 2008, and somewhat like Australia this economic expansion was also helped by resource discoveries and subsequent exports.
Australia has been an obvious beneficiary of the demand for resources from a developing China but there is growing demand from other developing Asian nations which is rarely mentioned in news articles but will continue to provide an economic boost in years to come.
Some economists disagree with this measure and Saul Eslake says his preferred measure is whether unemployment has risen by 1.5 percentage points or more in 18 months or less as it gives less false signals. His analysis has Australia already ahead of the Netherlands which is tied with Austria.

Regardless of what measure you believe in, Australia has a robust starting point of 2.5% growth per annum with about 1.5% coming from population growth. The latest Australian Bureau of Statistics (ABS) published demographic data for the September 2016 quarter showed that at the end of September 2016 there were an estimated 24.22 Million people living in Australia with the figure having increased by 1.5% over the prior 12 months.
This continued ongoing strength in immigration is also obviously a key driver which underpins the residential property market and will help to absorb some of the peak supply which is being delivered this year in some of the capital city CBD precincts. More importantly for our clients, it also means that demand for quality housing aimed at the owner occupier market in the inner-middle ring suburbs of east coast capitals will continue to remain strong.

So will this economic expansion continue to become the longest since post war Japan?

If I look at what has caused recessions in Australia in the past, it has generally been the Reserve Bank of Australia aggressively lifting interest rates to combat inflation. Many of us will recall the 18% interest rates just prior to our last recession in 1991 and bearing this in mind I really don’t see inflation running away in the near future as wage growth has been almost non-existent and the large amount of household debt will probably deter the RBA from tightening over the next year or more..

So, the answer is yes we probably will become the country with the longest period of economic expansion in the modern era and Australia will remain “the lucky country” for now.

The other important factor to consider is that tourism is once again becoming an economic driver for the economy as the Australian Dollar has declined over 25% against a basket of currencies and we can see many of the global hotel chains greatly increasing their number of properties coming on stream in Australia.

From a state basis, South East Queensland will be one of the biggest beneficiaries of this trend as the new mega casino complex that is currently being constructed in Brisbane is forecast to attract an additional 1.39 million tourists each year. It was also the state that suffered the most during the years of AUD strength and this has been rebalancing only over the last 2 years.

As an investor in Australian residential property, these macro themes add substantial comfort as long as we continue to observe the basic fundamentals to ensure that we are buying quality assets in the right areas and at the right price.

There is no substitute for research and experience!