Total Wealth Management
CALL NOW (07) 3281 1226
  • Our Team
  • Services
    • Retirement Planning
    • Centrelink Maximisation Strategies
    • Retirement & Superannuation Planning
    • Personal Insurance Advisers
    • Tax Planning & Strategies
    • Debt Recycling
    • Lifestyle Expense Planning
    • Wills & Estate Planning
  • Process
  • Contact
  • Facebook
Phone: (07) 3281 1226
Total Wealth Management
  • Home
  • About
    • Meet the Team
    • Testimonial
    • Our Advice Process
    • Fees & Charges
  • Services
    • Investing
      • Wealth Accumulation & Management
    • Insurance
      • Personal Insurance Advice
    • Tax Planning & Strategies
    • Loan & Debt Reduction
    • Retirement
      • Retirement Planning
      • Superannuation Advice
      • Centrelink Financial Advice
      • Wills & Estate Planning
      • Lifestyle Expense Planning
  • Knowledge Centre
    • Blog
    • Life Stages
      • Young Independents
      • Retirement Planning
      • Young Families
      • Mature Families
      • Pre-Retirees
      • Retirees
      • Twilight Years
    • FAQ
    • General Finance Calculators
    • Useful Links
    • Free Reports
  • Contact Us
  • Search
Total Wealth Management > Archived > Five things you need to know about the Australian economy

Five things you need to know about the Australian economy

September 6, 2018/0 Comments/in Archived /by Digilari

Key points

  • The Australian economy grew solidly over the last year.
  • While recession remains very unlikely, the combination of a slowing housing cycle, constraints on consumer spending and still subdued business investment will likely see growth slow going forward to around 2.5-3%.
  • As a result, spare capacity is likely to remain significant, keeping wages growth and inflation low.
  • We don’t expect the RBA to start raising rates until late 2020 at the earliest and the risk remains significant that the next move could be a cut.

Introduction

For years now, many have told us that Australia is heading for an imminent recession. By contrast official forecasts have long been looking for several years of above trend growth. In the event neither has happened and we don’t see them happening anytime soon. Against this backdrop there are five things you should know about the Australian economy.

First – the economy grew solidly over the last year

After several years of muddling along the Australian economy actually perked up over the last year with GDP growing a surprisingly strong 3.4% year on year, its fastest since 2012.

Source: ABS, AMP CapitalSource: ABS, AMP Capital
Source: ABS, AMP Capital

That growth has been able to range between just below 2% and just above 3% over the last six years despite a large drag on growth from the fall back in mining investment is actually pretty good. But it’s below the norm for Australia, which has averaged around 3% GDP growth per annum over the very long term. It should also be remembered that strong population growth has been one of the reasons for the relative resilience of Australia’s economy, but over the last year per capita GDP growth at 1.8% has been running below that in the US and in line with that in Europe.

Second – growth is likely to slow a bit from here

While economic growth averaged a strong 1% quarterly pace in the first half of the year it’s likely to slow going forward:

  • The housing construction cycle is turning down as approvals trend down and the cranes come down. Falling alterations and additions won’t help.
  • Growth in consumer spending is likely to slow given weak wages growth, high levels of underemployment and slowing wealth gains as home prices fall. With falling home prices its unlikely that households will be prepared to keep running down the household saving rate – which is now at a 10 year low of just 1% – to make up for weak income growth.
  • Business investment plans for the current financial year are still subdued pointing to roughly flat investment (if plans for this year are compared with those made a year ago) and political uncertainty could start to weigh ahead of a potential change in government.
Source: ABS, AMP Capital
Source: ABS, AMP Capital
  • Drought could knock 0.5 percentage points off economic growth this year.
 Source: ABS, Bureau of Meteorology, AMP Capital
Source: ABS, Bureau of Meteorology, AMP Capital
  • While agricultural production as a share of GDP is now just 2.5%, a 20% slump in farm production as seen in past droughts would still knock 0.5% off economic growth. If it turns into an El Nino phenomenon it could be worse.

Third – but it’s not going into recession

Despite these drags, recession will continue to be avoided just as it has been over the past 27 years:

  • Over the past five years or so the slump in mining investment back to more normal levels has knocked around 1.5% per annum from GDP growth. However, mining investment is no longer 7% of the economy and it’s near the bottom so its drag on GDP growth is approaching zero.

Source: ABS, AMP Capital
  • Public infrastructure spending is rising and has further to go.
  • Net exports are likely to add to growth as the completion of resources projects boosts resources export volumes, although a US/China trade war is a threat here.
  • Profits for listed companies are rising in contrast to the 2014-16 period. This is a positive for investment.
Source: UBS, AMP Capital
Source: UBS, AMP Capital
  • While profit growth has slowed from 17% in 2016-17 to around 8% it’s positive and 77% of companies in the recent reporting season (the highest since the GFC) have seen rising profits with 86% of companies raising or maintaining their dividends indicating confidence in the outlook.
Source: AMP Capital
Source: AMP Capital

So while housing construction will slow and consumer spending is constrained, a lessening drag from mining investment and slightly stronger non-mining investment along with solid export growth provide an offset and are expected to see growth between 2.5-3% going forward. Down from over the last year and slower than the RBA expects, but stronger than many doomsters see.

Fourth – spare capacity will remain for a while yet

With the economy’s potential (or sustainable) growth rate running around 2.75% and actual economic growth likely to run around this spare capacity in the economy will be with us for a while yet. To use it up we really need a long period of above trend economic growth, but this looks unlikely. Spare capacity remains most obvious in the labour market where the underutilisation rate remains historically high at near 14%. With it likely to remain high for some time to come it’s hard to see much acceleration in wage growth or inflation in the economy.

Source: ABS, AMP Capital
Source: ABS, AMP Capital

Fifth – which means RBA rate hikes are a long way off

The RBA’s forecasts for continuing solid economic growth and a gradual rise in underlying inflation argue against a rate cut and support the case for an eventual hike. But our more constrained view on growth implying lower for longer wages growth and inflation along with the risks posed by likely further falls in Sydney and Melbourne home prices, tightening bank lending standards and the drought indicate a rate hike is unlikely to be justified any time soon. The next move in rates is probably still up but not until second half 2020 at the earliest and there is a risk that the next move will actually be down if falling home prices pose a significant threat to consumer spending and inflation starts falling again.

Implications for investors

There are several implications for Australian investors.

First, continuing growth should provide support for reasonable returns from Australian growth assets.

Second, bank deposits are likely to provide poor returns for investors for a while yet.

Third, while Australian shares are great for income, global shares are likely to remain outperformers for capital growth.

Finally, the outlook remains for a further fall in the $A. With the RBA comfortably on hold and the Fed raising rates every three months (with the next move coming this month), the interest rate gap between Australia and the US will go further into negative territory making it even more attractive to park money in the US and not Australia which will drag the $A down. Threats to global growth from a trade war and problems in emerging countries will also weigh on the $A.

SOURCE: https://www.ampcapital.com/au/en/insights-hub/articles/2018/September/five-things-Australian-economy

 

Share this entry
  • Share on Facebook
  • Share on Twitter
  • Share on Google+
  • Share on Pinterest
  • Share on Linkedin
  • Share on Tumblr
  • Share on Vk
  • Share on Reddit
  • Share by Mail
0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Like to know more…

Enter your details and we will contact you with in 24 hours

    Want to learn more?

    Come in for a chat!

    Get in touch for your FREE no-obligation consultation. Appointments available during business hours or after hours by appointment.

    Get In Touch

    Financial Advice Services

    Pre-retirement and Retirement Planning

    Centrelink Maximisation Strategies

    Superannuation Fund and Strategy Advice

    Self Managed Superannuation Funds

    Personal Risk Insurance

    Wealth Accumulation

    Tax Minimisation and Tax Planning

    Debt Management

    Lifestyle Expense Planning

    Estate Planning

    Useful Links

    Meet the Team

    Our Advice process

    Fees & Charges

    Blogs

    Financial Calculators

    Financial Services Guide

    Privacy Policy

    Terms & Conditions

    General Advice Warning

    Opening Hours

    Appointments available outside these times by prior arrangement.

    Monday 9am - 5pm
    Tuesday 9am - 5pm
    Wednesday 9am - 5pm
    Thursday 9am - 5pm
    Friday 9am - 4pm
    Saturday Closed
    Sunday Closed

    Our Office

    11 Lawrence St, North Ipswich QLD 4305

    Contact Us

    Phone: (07) 3281 1226
    Email: twm@totalwealth.com.au
    Fax: (07) 3282 9900

    Postal address

    PO Box 2648, North Ipswich QLD 4305

    Enquire online

    LFG Financial Services
    Total Wealth Management is an authorised representative of LFG Financial Services
    © Copyright Total Wealth Management Pty Ltd ALL RIGHTS RESERVED. | Design by SG to 'By Digilari'
    • Financial Services Guide
    • Complaints Policy
    • Privacy Policy
    • Terms & Conditions
    • General Advice Warning
    Freelancing or in a startup? Here’s five ways to look after your super Newsletter – 7th Sep 2018
    Scroll to top