Pete Wargent blogspot

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

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Monday, 1 August 2016

Recession? Still no

Slowing economy

When I started this blog some years ago, one of the main premises was obviously that I felt Sydney property should still be marked to outperform. 

Another was that while a technical recession can pretty much never be ruled out, Australia should have enough monetary and fiscal firepower to keep its economy moving forward without sinking into recession.

So far, despite falling commodity prices and in turn resources construction, economic growth has held up pretty well, all things considered. 

And in fact Australia's performance over the past dozen years has been the envy of other developed economies. 

Source: Budget

In the last week or so there have been all the usual recession predictions. 

Still unlikely, and here are a few reasons why...

1 - Population growth persists

Firstly strong population growth is keeping the economy growing.

Of course, population growth itself isn't any kind of end goal, but ongoing net immigration does reflect that the economy is at least still creating jobs - and also with the lower dollar the tourism and education sectors are very strong. 

In fact, the headcount in Australia is probably up by more than +400,000 over the last year, while recent student visa changes will keep population inflows from Asia ticking along. 

2 - LNG is coming

Secondly, mining export volumes are expected to ramp up by about 7 per cent in 2015-16 and 7.5 per cent in 2016-17, driven by iron ore and LNG exports following the mining investment boom. 

Indeed, LNG exports are forecast to triple between 2015 and 2021. 

More than $200 billion has been invested in Australian LNG projects over the past decade, with a massive ramp up in production now to follow over the next five years, which will in turn be a significant boost both real and nominal GDP growth.

Of course while low oil prices lead to cheaper fuel at the bowser (great!), lower oil prices are simultaneously a negative for LNG prices - with much of our exports are produced under long term contracts, which are broadly linked to the price of oil.

So weaker oil prices would not be good for income, were they to persist. 

3 - Infrastructure boom

Some forecasters predicted gloom from 2008 forth because high and accelerating inflation would put a stop to interest rate cuts - wildly wrong on both counts, which just goes to show how difficult it is to predict the future.

The Melbourne Institute today reported another very soft inflation result for July, with the annual inflation gauge down to just 1 per cent. 

Meanwhile, Australia's 10 year government bond yield hit yet another record low today, and the 2 year bond yield is pricing in two further rate cuts. 

Although it doesn't get as much coverage as it might, with the cost of debt at record lows the Australian government has been issuing bonds like billy-o in recent times, with nearly $400 billion of treasury bonds on issue.

The red bars denote how spectacularly low some of the coupon rates are on recent issues. 

And the proceeds are being shoveled into infrastructure investment, particularly a number of major transport projects. 

4 - Dwelling construction 

Dwelling commencements are at their highest level on record.

And with a record number of attached dwellings underway, the residential construction industry will be operating at close to full capacity for quite some time to come (unlike most detached house commencements, multi-unit developments can take years to complete). 

This may not contribute much more to growth in itself, granted, but the strong multiplier effect probably will.

The wrap

There are some other points, and counter-points, that could be made.

Of course, it doesn't much matter what I think.

But the Reserve Bank of Australia  (RBA) sees unemployment continuing to fall steadily over time and the economy continuing to grow at about 3 per cent per annum. 

Source: Reserve Bank of Australia

The Reserve Bank will release its latest Statement on Monetary Policy on Friday, so it'll be interesting to note any changes to these forecasts. 

Interest rate decision tomorrow arvo.