In an economic sense, Australia has often been referred to as the “lucky country”. This, after all, is the country that has not been in recession (defined as two consecutive quarters of negative growth) since 1991 and who, by all accounts, had a “good crisis” while the rest of the developed world suffered an economic heart attack in 2008. The “luck” that they benefitted from over the last 30 years was centred on their mining boom, where dozens of mining projects were undertaken that created jobs and wealth for the domestic workforce, with a ready-made buyer of their commodities in the form of China – ensuring that Government coffers were well stocked via the higher tax take. All was right with the world. But, as we all know, nothing lasts forever. The end of the mining boom was well flagged with other areas of the economy now needed to fill the gap.
Source:Bloomberg, 31st December 2018
Before the rest of the economy had a chance to fill that gap, a new cloud has emerged on the horizon. As in the UK, the housing market in Australia was often highlighted as one with unstainable valuations and over indebted households – but in the cities of Sydney and Melbourne, the level of house prices was always explained away as a supply and demand story.
In early 2018, serious questions were starting to be raised on the outlook for the housing market and risks a slowdown would bring to household wealth, consumption, and, in turn, construction jobs. Having reduced the demand from foreign investors through regulatory changes, next we saw a pullback in the provision of credit for mortgages from domestic banks. This caused the historically robust demand to decline at a time when the supply of houses and apartment blocks was still rising.
What started as a campaign by a couple of economists soon began to gather support and momentum as their forecasts became reality. House prices peaked in late 2017 and fell steadily through 2018, before contracting in second half of the year. The collapse in building approvals that has continued into this year implies that house prices may have further to fall.
Source:Bloomberg, 31st January 2019
With the spill over effects into the broader economy clear, the Reserve Bank of Australia (RBA) could only ignore the risks for so long. Having maintained a hiking bias for much of the past 12 months, the RBA changed its tone in February, moving to a neutral stance in response to the weaker outlook for growth. Today’s Q4 GDP print of only 0.2% QoQ validated this move and has opened the door to the potential for multiple interest rate cuts – only 3 months ago rate hikes were being both priced in and expected. Time will tell whether the central bank will act as aggressively as the market expects, but for now, the balance of risks are firmly skewed to the downside with the chance of a credit crunch ticking higher. The Kames range of portfolios will look to benefit from this as we can position for expected rate cuts to be delivered.
The speed of the slowdown in growth has been sharp, coming at a time when global growth is also slowing and the timing of this domestic generated weakness has created something of a perfect storm for the Australian economy.
For now, it feels like the Australian economy may finally be running out of luck.