The Australian Economy: Is the Writing On the Wall at the Fork in the Road?

Posted by Stephen Koukoulas on Nov 23, 2018 1:10:56 PM

The Australian Economy: Is the writing on the wall at the fork in the road?

The Australian economy is set to enter 2019 at a crossroads – one path is for continued success, and a 28th year with no recession, the other, leads to a downturn that will be driven by falls in household wealth as residential housing prices drop.

Factors inspiring confidence

The good news is the economy is still growing and the unemployment rate is on a downward trend. Exports and public sector infrastructure are solid and private sector business investment is stabilising.

The illion Business Expectations Survey continues to paint a favourable outlook for the economy over the next few months with sales, profits and selling prices all looking strong. This business optimism is tempered by concerns surrounding consumer spending and the rising cost of energy.

There’s also good news with the illion late payments data which show firms continuing to pay their bills at near-record pace. In other words, firms are ‘cashed up’ and embracing new technology to pay their bills relatively quickly.

Economic concerns

The concerns about the economic outlook stem from the cautious consumer and the decline in wealth as house prices and the stock market fall.

Consumer spending, which accounts for well over half of the economy, is at risk of weakening as we move into 2019.

There’s a well-established, strong link, between wealth (mainly house and stock market prices) and growth in household spending. When wealth is rising, householders are more willing to spend, but accumulate less savings, borrowing more or cashing in their assets. Now, with house prices down nearly 6 per cent from the 2017 peak and the stock market under pressure, consumers are likely to pare down their spending. This view is reinforced by evidence of individuals paying back debt, which means lower spending.

Finally, in the list of concerns for the household sector is that the saving rate has declined to just 1 per cent of income – a 10-year low. There is clearly a limit to how much more consumers can use their savings to fund spending.

While illion’s data confirms bankruptcy levels are generally lower, a signal of consumer stress is showing up with a rise in bankruptcies for the 18 to 24-year-old demographic.

Another big picture risk for the economy is a sharp decline in new dwelling construction which is accompanying the decline in house prices. There is evidence of oversupply in several capital cities which is likely to see the number of dwellings build drop by up to 20 per cent in 2019.

Ultimately, the economy is in a grey area – some good signs as well as some growing concerns.

Suffice to say, 2019 is likely to be another year where there is mediocre growth, ongoing low inflation and a stalling in the improvement in unemployment. It also means that interest rates are set to be on hold with the jury still out whether the next move from the Reserve Bank of Australia is up or down.

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Topics: Australian Economy, Economic Forecast, Business