Economy Slows while Australian Property Advances

Welcome to my first article for my Economic Highlights blog for Property Club!

As you could imagine, reading the economic winds as they blow through the world can be a challenging task, but I will do my best to provide you with a barometer that will give you a deeper perspective of what’s happening and how it will likely impact you as investors.

The world is a far more prosperous place than most people appreciate and recent global economic data continues to support my central view on this. China’s exports are not contracting, but expanding for the fifth straight month! The US economy is booming at 3.7% growth and probably even better than that in real time. Even Europe is doing well with upward revisions to economic data for the region as a whole. It might even surprise you that Italy and Ireland are doing well - and better than Australia!

China - still growing at 7%[/caption]

Yes, while the world is more prosperous than people think, back home we have some serious challenges.

Our latest economic growth rate, GDP (gross domestic product), is currently running at only 2.0%. To put that in perspective, Europe as a whole is running at about 1.5% and that region is supposed to be in trouble. The US is almost double Australia’s meagre performance at 3.7%. China continues to perform at an extremely elevated level of 7%, while Japan which has had rolling power shortages ever since the Tsunami disaster wiped out its nuclear reactors, is running at about 1.2%. The other giant of the new global economy, India, is growing at an incredible 7% too.

So what is going on in Australia?

Well, there is the commodity price drop. Yet prices are still higher than they were a few years ago, and we’re exporting more in terms of volume than ever before. The real problems (plural) with the Australian economy seem to be a hangover from our colonial past. The Federal Senate, designed to protect state interests, is now purely another level of party line politics, with the added confusion of minority group representation. It makes for difficult long term economic planning and accomplishment.

We also suffer from being a mature multi-government level democracy. We have more rules than just about any other nation on earth. With a fully mature capitalist economic system, competition has been around for a long time and we’ve achieved regulation overload. Taxation to pay for the administration of all that regulation is through the roof, and as a result profit margins for businesses are squeezed tight. That’s a very different situation to Asia where profit margins are still large, while regulation and taxation is low. It’s no wonder Asia is booming. Yet in comparison to the USA with a similar historical setting, though without the resources boom, Australia rates poorly.

Basically, the miners’ success has masked our significant problems. The good news is that we are now beginning to see more clearly, just how low our economic performance has truly been. This should bring about renewed political focus to change things and move ahead. The Courier Mail recently ran an editorial calling for BOLD economic reform in Australia. I have been arguing exactly that, wherever I have had the opportunity, for several years now!

So the tide is shifting on the domestic scene toward embracing reforms that, like the Hawke-Keating efforts of the previous century, and the strong follow through by Howard-Costello, delivered an amazing period of fresh energy and growth to our economy. We could actually be on the precipice of a new and exciting period in Australia.

Naturally it always looks darkest before the dawn. This is what motivates people to lift their game. Yet it isn’t really that dark, this dawn of ours, to begin with.

We have most certainly benefited enormously from the strong and unprecedented growth and of China’s blossoming. Indeed all of Asia has, and this has generated a new era where Asia is no longer US or European dependent for its strong growth periods. Asia has come of age, and luckily for us we are now irrefutably a part of Asia.

What does all this mean for property?

Absolutely everything!

Because of the new, instantaneous interconnected world we live in, any concerns or great performance of economies and markets anywhere in the world, have an impact on how confident people feel about investing and going about their normal lives in their own countries.

The media will always be more negative than the reality. That’s their job.

The facts are that the world economy continues to emerge from a period of challenges largely intact, and even picking up the pace quite substantially!

Australia’s problems are now rising to the surface for everyone to see. Take for instance the un-employment data of 6.2% released just the other day. China, Japan, the USA, all have lower un-employment than Australia? We really have no excuse, and so action - bold action, is now inevitable.

A resurgent Australian economy in the 1-3 years ahead will add significantly to the already strong upward pressure being exerted on Australian property prices by foreign buyers from all countries, not just China, and for all sorts of reasons. China particularly will increasingly look to Australia for substantial property ownership.

Next week I will be chatting about the various specific hotspots in the Australian property landscape, but in the meantime keep adding to your portfolio without delay. There is no bubble, for we are now part of a much bigger picture than mere Australian economic statistics.

Clifford Bennett