Housing slump takes its toll
A slowing economy increases the odds of another interest rate cut
David Bassanese OUTLOOK
E
xpectations for the Australian econ-
omy have shifted notably in recent
months – and sadly not for the bet-
ter. The good news, however, is that some
of the worst fears for the global economy,
which led to the equity market slump in
late 2018, are starting to dissipate.
But first, the Australian economy. The
bottom line is that the housing downturn
has deepened and broadened across states,
so much so that it’s now posing a serious
risk to consumer spending, which accounts
for a considerable 60% of the economy.
Having been sustained at very high levels
for several years, home building approvals
have finally started to slump, as the weight of
house price weakness, a desertion of foreign
buyers, tax-related fears and pockets of apart-
ment oversupply all start to take their toll.
Although home building remains at a high
level, the pipeline of activity should start to
diminish over the coming year, which willThat said, even allowing for added fiscal
stimulus from whichever political party wins
the federal election, it’s unlikely to be big
enough and fast enough to offset the increas-
ingly downbeat outlook for the housing and
consumer sectors. The cyclical swing effects
of the housing sector can be significant at
major turning points, while slower-moving
consumer spending nonetheless accounts
for a sizeable 60% of the economy.
All up, it now seems likely that growth
will slow to a sub-trend pace over the com-
ing year and the unemployment rate will
start to rise, which in turn makes it likely
the Reserve Bank will be forced to cut
interest rates to even lower levels.
Globally, the doom and gloom of late
last year is starting to ease, although it still
seems likely that global economic growth
will slow and equity markets will find it
harder to continue the strong bull rally of
recent years.
Most importantly, the US Federal Reserve
has shifted its thinking and no longer feels it
needs to lift interest rates further this year.
This has come as a big relief to markets. It is
also encouraging that US-China trade talks
continue and both sides seem keen to avoid
escalating tensions.
That said, US economic growth and
corporate earnings are slowing to a more
moderate pace after being buoyed by tax
cuts over much of 2018. Chinese growth
also continues to slow, albeit in a con-
trolled fashion. The biggest disappoint-
ment in recent months has been Europe,
where China’s slowdown, new environ-
mental regulations, Brexit woes and slug-
gish population growth are all taking their
toll. As a result, the European Central
Bank has joined the growing group of
global central banks that have decided
to indefinitely delay lifting interest rates
back to more normal levels.David Bassanese is chief economist at
BetaShares.undermine both jobs in this highly cyclical
sector and related home-buyer spending on
new furnishings and whitegoods.
At the same time, the progressive decline
in Sydney and Melbourne house prices
appears to have finally weighed on consumer
spending, with more households feeling not
as wealthy as they once were. Consumer
spending over the second half of 2018 was
quite weak. It’s no surprise that once-buoyant
measures of business sentiment have also
taken a tumble since late 2018.
Of course, it’s not all gloom and doom
in the economy.
State governments across the country are
undertaking multibillion-dollar infrastructure
programs. Construction of office blocks and
health-related facilities (such as aged care)
remain strong. Also a cheaper Australian
dollar is seeing more tourists and foreign
students flock to our shores.
Continued solid Chinese demand and
supply disruptions in Brazil have contribut-
ed to a rebound in iron ore export prices,
which in turn has boosted corporate
profits and federal government budget
revenues. And some of this export
related bounty is being recycled
back to households through
tax cuts announced in the
recent federal budget.