Australia can defy economic gravity for longer


For one, the property frenzy that has been a staple of dinner conversations is easing. Nationwide house prices increased by almost 50 per cent in the five years to late 2017, according to the Reserve Bank of Australia (RBA). In 2018, they dipped nearly 5 per cent, says consultancy CoreLogic, making it the worst year since 2008.

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While the net worth of home owners in Sydney, Melbourne and beyond remains robust, such reversals can have a damaging psychological effect on consumer spending. Post-Christmas discounts lingered well into February.

While the Aussie cool-down is real, a cautious optimism may also be justified.

The real estate boom, for one, was fuelled by Asian buyers, plus cheap credit and tax breaks that encouraged Australians to invest in rental properties. Now, demand has eased, and loans are tighter as banks come under pressure to clean up.

Supply, meanwhile, has caught up, thanks to a lengthy construction boom. Softer prices, then, may be a healthy retreat, not a sign of impending doom: they have only fallen to mid-2016 levels.

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Pay also may not be as bleak as it seems. Despite stagnant salaries, unemployment fell to a near eight-year low in February, having already hit records in regions like NSW.

What’s more, underemployment, a hidden source of spare capacity, is just beginning to stabilise. Thanks to several large projects, miners and other companies are already reporting inflation in the western part of the country. The RBA expects a “gradual increase” in wages nationally.

Household debt is a valid concern – among the highest in the world – thanks to a housing market worth more than five times the country’s $US1.3 trillion ($1.8 trillion) GDP. Such borrowing dominates bank balance sheets. While it could magnify a downturn, it won’t necessarily trigger one.

Interest rates are low, and much of the debt is held by younger and wealthier people in better position to pay it back. More importantly, riskier interest-only loans represent a far smaller proportion of the total than they once did: just over a quarter, according to the RBA late last year, compared to a peak of about 40 per cent.

Then there is China, which accounts for about a third of Australia’s exports. Iron ore prices have jumped following a tragic dam accident in Brazil, unexpectedly driving up the value of supply from the likes of Rio Tinto and BHP. Beijing also has signalled that it is pressing ahead with stimulus of a sort. Short of geopolitical tensions flaring up again, robust demand for minerals and metals should persist.

More than half of Australia’s workforce has never experienced a significant downturn during their careers.

While those factors are ultimately out of Australia’s control, it has some degree of command over its fate. For one thing, interest rates, while low, stand at 1.5 per cent. That gives the central bank more room to manoeuvre than peers in Japan or Europe, even if cuts won’t necessarily get people buying houses.

Better still, there is fiscal firepower. Canberra has slashed its expected deficit for the year to June, and put itself on track for its first budget surplus since the financial crisis. That can fund tax cuts ahead of a May election, but also much-needed spending on roads, public transport and more, to accommodate a population due to exceed 30 million by 2031. A 2019 list from Infrastructure Australia, an independent government agency, identifies a project pipeline worth more than $US40 billion.

More than half of Australia’s workforce has never experienced a significant downturn during their careers. That makes it harder for chief executives and economists to anticipate how a slowdown like this one might affect the collective psyche.

If nothing else, though, at least elected officials have some degree of power to sustain the country’s mesmerising act of economic levitation.

Reuters Breakingviews

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