Economic outlook for the lead up to Christmas

Aug 30, 2016

Australia certainly faces a number of speed bumps as the economy continues its ongoing transition to non-mining activities. In the face of falling commodity prices and mining investment, the focus is shifting towards housing construction and the services sectors, although growth is still being supported by commodity exports as much of the capacity built during the mining investment boom comes online.

Not all states are equal

Not all states are benefiting equally from the transition. According to a recent CommSec ‘State of the States’ report, services powerhouse New South Wales is showing the strongest economic performance, followed by Victoria, helped along by sound retail spending, a lower Australian dollar and population growth. Mining dependent states Queensland and Western Australia are the worst performing, along with Tasmania. This, of course, is reflected in the growth in residential property values, with Melbourne and Sydney enjoying price booms while other capital cities limp along.

Home and abroad

Overall, the economy faces several challenges including low inflation at 1.5%, an uncertain jobs outlook and paltry wage growth which is holding back the growth in household disposable income. This has affected retail spending, which grew by a mere 0.1% in June to be just 2.8% higher over the year.

Internationally, the economies of Australia’s major trading partners are growing at just below their long term averages. According to National Australia Bank (NAB), Brexit has had less impact on the global economy than many feared. Financial markets are generally either back to pre-referendum levels or even stronger, and the direct economic fall-out looks like being largely restricted to a UK recession and modest spill-over to European trading partners, says NAB.

Silver lining

Despite the grey clouds, Australia’s real GDP still grew strongly by 1.1% in the three months to March 2016 (up from 0.6% in the last quarter of 2015), largely driven by strong exports growth and declining imports growth.

Silver linings are also starting to appear. Recent confidence surveys reveal an uptick in consumer sentiment. Business confidence softened in July, but continues to show resilience despite external factors such as Brexit and the Federal election. All in all, economists predict a sound economic performance this year. The Commonwealth Bank of Australia, for example, expects the economy to grow by 3% in 2016 while NAB says growth will remain resilient at 2.9%.

The outlook for property

So what does this mean for property prices, and especially those in Sydney, as we edge towards the end of 2016? The interest rate cut in August is unlikely to have a big impact as major banks are not passing it on in full. But looking ahead, many economists predict one or two interest rate cuts.

NAB chief economist Alan Oster, for example, believes the RBA will need to cut interest rates by 25 basis points in both May and August 2017 to stabilise the jobless rate at around 5.5%. What might start to bite, though, is the NSW government’s introduction of a foreign investor surcharge of 4% on stamp duty and 0.75% on land tax for residential real estate. BIS Shrapnel expects NSW to escape the oversupply of dwellings expected in other states.

But in the near-term, the outlook is still fairly positive. Moody’s Analytics expects house values nationwide to rise 6% this year and 4.1% in 2017. It says much of the increase this year will be driven by continued gains in Sydney, where values are forecast to rise 7.3%, or about half the 14.9% rise in 2015.