Can Australia's economic 'green shoots' survive?

market analysis

Like a experienced gardener, the Australian economy needs care an attention to take hold and grow


Paul Ashworth, Managing Partner
David Clark, Director
Tristan Bowman, Manager

Posted 20 August 19

There are nascent signs of 'green shoots' emerging in the Australian domestic economy. The critical question is whether they can truly take hold and support meaningful, sustained economic growth.

Has Housing Bottomed Out?

Baseball is America’s favourite past-time. In Australia, it’s property prices.

We observe some initial evidence that housing prices might have bottomed out (refer to house prices in graph 1) and that property activity has improved (see clearance rates in graph 1). Employment data has also been strong. Both these outcomes provide some welcome relief to households in the form of stabilisation of their household wealth and confidence in their ongoing employment. To be sure, all policy levers have had to do some gargantuan lifting to deliver these 'green shoots'. These policy actions have been in the form of:

  • the cash rate being positioned to go below 1% (having recently dropped 50 basis points to 1%)
  • election promise cash hand-outs now being delivered to those that have a propensity to spend
  • APRA announcement on changes to banks assessment of loan serviceability
  • sustained infrastructure spending by the States
  • sustained population growth and household formation

Graph 1: Capital city prices and auction clearance rates

Diagram showing Graph 1: Capital city prices and auction clearance rates

All things considered, these domestic policy actions, together with continued external export strength, should be seeing out-and-out robust economic growth, growth in incomes and a well-supported housing market – it’s not though.

There has been some downward re-basement in residential house prices which, when combined with the above policy ‘smorgasbord,’ has resulted in some stability in house prices, which is positive. Going forward, Cameron Harrison sees the likely outcome being a side-way movement in house prices with modest, improved activity. This position is consistent with our ‘sludge’ economic outlook for the next few years, and it is our base view. That said, there are various factors which we are monitoring, which could somewhat adversely impact this view, and would result in ‘sludge’ move to a recession (discussed below).

The Household is Doing it Tough

The household, and with it the consumer, has reached its limit after enjoying ten years of unprecedented prolificacy (perversely coming out of a financial crisis). The productive, income-earning household is now burdened with ‘nose-bleeding’ imposts which have become rather immovable. These imposts see:

  • Australian household debt of 120% of GDP (advanced world average is 72%) and Australian house prices to per capita income more than double the advanced world
  • Taxation for the top quartile of Australian households is OECD ‘best’ practise, that is, it’s through the 'roof'. Bracket creep has been insidious, and it has financed runaway and seemingly uncontrollable State, Federal & Local government spending - clawing back tax creep seems almost impossible
  • Energy policy seeing electricity prices in Australia up over 80% in the last ten years and gas over 50% – in the US, energy prices have fallen.
  • Household income adjusted for inflation has not grown in the previous five years – refer to graph 2.

Graph 2: Per capita household income and real GDP

Diagram showing Graph 2: Per capita  household income and real GDP

What could make it tougher for households?

The consumer is the core of Australia’s economic engine (consumption representing over 60% of GDP), and household health is central to the consumer’s economic spirits. Cameron Harrison is extremely watchful of the following factors which could see ‘sludge’ move to a recession environment. The three elements are:

1. Households increase their level of saving and concurrently reduce their consumption. Given the fall in house prices, it is remarkable how households have been prepared to continue drawing down on their savings. The risk is significant as we view savings draw-down as unsustainable.

Graph 3: Consumer spending - income and savings

Diagram showing Graph 3: Consumer spending - income and savings

2. Employment growth moderates. The key driver of recent employment growth has been the ‘runaway train of public sector’ employment growth. With the National Disability Insurance Scheme (NDIS) now largely employed for, we see a risk to employment growth and a deterioration in unemployment.

Graph 4: Private/public sector employment growth

Diagram showing Graph 4: Private/public sector employment growth

3. House prices stagnate (or fall), and with it, household wealth falls. This will dampen consumer spending spirits (negative wealth effect) and reinforce increased savings, which in turn will reduce economic growth.

Peace of Mind Investing

Cameron Harrison have been advising business owners and their families on asset allocation and intergenerational wealth management for over 50 years. We have demonstrated over a long period our ability to manage investments through both the good times and bad by keeping the client at the centre of our business.