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The Australian economy: where to from here?

The Australian economy is in good shape and we should be quietly optimistic for the year ahead, so long as we don’t let the noise and distractions of the global economy affect us.

That was the sentiment from Shane Oliver, Chief Economist & Head of Investment Strategy at AMP, speaking at our most recent Moir Group economic event in North Ryde.

With the event held on the same day that our next Federal Election was announced and a week after the Federal Budget dropped, Shane shared his thoughts on what impact this would have, where the property market is forecast to head and what’s happening in the global economy that we should be aware of.

The Federal Budget

Some of the proposed measures announced by the Federal Government that we should be aware of, according to Shane, included:

  • A $21 per week “tax cut” for low-middle income earners (which is double what last year’s budget was)
  • The introduction of one-off payments to 3.9 million welfare recipients.
  • Expanded and increased small business instant asset write-offs.
  • Earlier tax cuts for small and medium businesses from 2022.
  • An extra $25 billion in infrastructure spending over the next decade.
  • Measures to make it easier for 65- and 66-year olds to make voluntary super contributions.

Based on the above, the Federal Government forecasts a return to surplus in 2019-20.

It is unclear at that stage, what impact, if any, these proposed measures will have on the Australian economy, especially in light of the upcoming election. Shane believes it will be a ‘wait and see’ approach.

The Australian property market

There are several factors in play at the moment, that are creating a perfect storm for downward pressure on Australian property prices. These factors include:

  • Poor affordability – wages growth has been low, meaning buyers don’t have the income to buy, which has lead to an oversupply of housing and further downward pressure on housing prices.
  • Tighter loan conditions – it is becoming harder for people to get a loan.
  • Record unit supply – more units are now available then ever before, however there is an increasing number of units that are vacant, due to a drop in consumer spending.
  • Switch from interest only to principle and interest loans – affordability is impacted.
  • FOMO (Fear Of Missing Out) to FONGO (Fear Of Not Getting Out) – the market is jittering and so people are holding onto their property longer than expected or taking a price that is lower than what it’s worth.
  • Uncertainty regarding negative gearing and capital gains tax – this is due to the likelihood of a change in government.

All of these factors combined have led to a reduction in investment into the economy and a drop in consumer spending. Spending is down and growth has slowed, but the situation is not as dire as we may be led to believe.

Global economic outlook

So, what’s happening globally, that will (and has been) impacting the Australian economy? Shane pointed to a few factors:

  • Global growth is slowing, however, Shane indicated that we should be safe from a recession, both locally and globally.
  • Inflation is around target in the US and the Fed is likely to pause its rate hikes for six months. This bodes well for the rest of the world – we have not seen a recession in the past when these conditions are in play.
  • Shane believes that the RBA will cut the cash rate to 1% and we will see the Australian dollar weaken further.

As always there are risks. The key risks that he sees, that we should be aware of in the months to come (and watch closely), are:

  • The trade war between China and the US – there is growing uncertainty around the imposition of further trade restrictions. An increase in prices may reduce demand, which could flow on to a reduced demand from the Chinese for our resources.
  • A slowdown in the Chinese economy – this could have ramifications for our economy and lead to a reduction in demand for our resources, not only coal and iron ore, but services such as education and tourism.
  • President Trump – he is seeking re-election next year and has turned to trade to boost his popularity. This could have a flow-on effect for our economy.
  • The Australian property market – falling property prices could lead to reduction in construction, thereby not aiding employment. It also leads to consumers to tighten their spending, and put further pressure on interest rates.

While it is clear that there will be tough times ahead, our economy still remains stable and there is cautious optimism for the remainder of the year.

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