Pete Wargent blogspot

CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Saturday, 7 January 2017

Are there any upside risks for the economy?

Upside risks?

It's become traditional at this time of year for the media to mention all the potential gloom and risks facing the economy - the auto assembly industry shutting down is an old favourite, and resources construction declining, of course. Thing is, we've known about these issues for aeons now. 

What is rarely mentioned is that if the all of the downside events do play out the declining Aussie dollar would bear the brunt of the adjustment, quickly declining to 40 to 50 cents.

Given that the Reserve Bank seems unwilling to cut interest rates further, a strong increase in business investment over the next couple of years admittedly doesn't seem all that probable.

Regardless, nothing is all good or all bad, and here are a few possible upside risks for the economy.

1 - Manufacturing jobs increase

The car industry will see some manufacturing jobs go this year. Still, manufacturing employment soared by +102,000 last year, and the PMI gauge is in positive territory too. Any more to come where this came from with the lower dollar?

2 - Unemployment rate drops towards 4 per cent (& wages breakout)

The unemployment rate has declined from 6.3 per cent to 5.7 per cent at the latest reading. A sharp decline towards 4 per cent isn't in anyone's base case, but it's not out of the question either according to the Reserve Bank's modelling. 

3 - Mining investment bust ends

Commodity prices soared by 45 per cent last year, and bulk commodities ripped higher by 145 per cent, so it wouldn't be a huge surprise if the nadir is in sooner than expected, possibly before the calendar year is out.   

4 - LNG price increases 50pc

LNG export volumes are forecast by Treasury to triple between 2015 and 2021. 

The Henry Hub natural gas spot prices is up by more than 75 per cent from one year ago, and there could be more to come yet as oil prices rebound. 

5 - Property prices rise 12pc in 2017, unleashing a wealth effect

SQM Research see strong price gains nationally as possible, with prices in Sydney to rise by as much as 18 per cent.


Source: SQM Research

The wealth effect on household expenditure doesn't seem all that likely, but stranger things have happened, especially with household wealth passing a record $9 trillion last year.

6 - Infrastructure booms

The NSW state government has zero net debt for the first time on record on the back of the biggest stamp duty boom in Australia's history, which should fund some serious infrastructure investment. 

Nationally, an infrastructure boom could be underway...

7 - China unleashes its capital account

China has a rapidly urbanising population of 1.4 billion. If the capital account ever gets unleashed to buy international assets in earnest...well, there are only 24 million of us...

8 - Tourism & education boom

Tourism and international student arrivals are already booming, and arrivals could rise 10 to 15 per cent over the next year following a streamlining of student visa rules, helping to send annual population growth back towards 450,000 per annum. Chinese visitor spend is also already exploding

9 - Global growth accelerates, Australian GDP to above 5 per cent

The Trump victory becomes a global turning point, and a combination of expansionary policy overseas and a revival of the animal spirits sees Australia's GDP growth accelerate to above 5 per cent.
The wrap

We won't see all of these unfold of course, but four or five of them could easily play out.