2019 An Economic Perspective

Tuesday, December 18, 2018

2019 is likely to be an interesting year for the Australian economy. Some of the big drags of recent years are easing. At the same time, housing is turning down, uncertainty is high around the global outlook and it’s an election year in Australia which will add to uncertainty.

Over the last year a combination of factors have come together to cause a downturn in the housing cycle (particularly in Sydney and Melbourne) These include: poor affordability; tight credit conditions; a surge in the supply of units; a collapse in foreign demand; borrowers switching from interest only to principle and interest loans; fears by investors now that changes to negative gearing and capital gains tax are on the horizon.

If House prices continue to fall it will likely lead to a drag on growth in general.  The main impacts may be:

  • a direct detraction from growth as the housing construction cycle turns down.
  • reduced demand for household equipment retail sales
  • a negative wealth effect on consumer spending
  • it may also lead to further bank credit tightening if non-performing loans and defaults rise.

On the upside, a huge slump in national property prices is thought to be unlikely. Australia hasn’t seen the sort of deterioration in lending standards seen in the US prior to the GFC.

While a slow down is likely, other factors indicate a recession is unlikely:

  • The drag on growth from slumping mining investment is fading as mining investment is getting close to the bottom.
  • Public infrastructure spending is rising and has further to go.
  • Net exports are likely to continue adding to growth (assuming the trade war settles)

In this environment unemployment, wages and inflation would likely remain fairly steady.  

Under these conditions there would be several implications for Australian investors.

  • First, bank deposits rates will remain low
  • The RBA may cut rates, and with the US Fed hiking (albeit slowing), the $A is likely to fall further.
  • Australian bonds are likely to outperform global bonds.
  • While Australian shares are still great for income, global shares are likely to remain outperformers for capital growth.
  • The housing downturn would weigh on retailers, retail property, banks and building material stocks.

As always, it’s important to stay in touch with your financial adviser to make sure you are best positioned within our ever changing economy.

This document was prepared without taking into account any person’s particular objectives, financial situation or needs. It is not guaranteed as accurate or complete and should not be relied upon as such.  Maher Digby Securities does not accept any responsibility for the opinions, comments, forward looking statements, and analysis contained in this document, all of which are intended to be of a general nature. Investors should, before acting on this information, consider the appropriateness of this information having regard to their personal objectives, financial situation or needs. We recommend consulting a financial advisor