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Craig James, CommSec’s Chief Economist, weighs in on the state of the economy and lets us know what we can expect to see over the coming year.

Q. Is the global economy strong or weak at the moment?

The global economy is in reasonable shape right now. China and the United States are growing. Even Europe is growing at the moment – it’s expected to grow by over 2% this year. Inflation is very much under control. The US Federal Reserve has taken its time in lifting interest rates and that has resulted in a higher Australian dollar, which is good for travellers but not so good for our retailers and exporters.

Q. How is the growing wealth of Chinese consumers affecting Australia?

Iron ore and coal are our principal exports to China, but the authorities in China also want the Chinese consumer to play a bigger role in driving the Chinese economy. And indeed, that is happening. The Chinese are also travelling abroad and China and Hong Kong now provide the bulk of tourists visiting Australia.

Our food and consumer products are regarded very highly by Chinese consumers and they’re buying more and more of our high-quality products. So, there are plenty of export opportunities with China and it will continue to grow the Australian economy over time.

Q. It has been nearly three decades since our last recession in Australia. So why isn’t the economy in better shape?

Even though we have the world’s longest expansion – twenty-six years without a recession – consumer confidence is down. Business conditions, however, are at the best levels we’ve seen in about a decade.

One of the major reasons for soft consumer confidence is that wages are growing at the slowest pace on record at about 2% per annum. Prices are actually growing at a slower rate than wages, so wage growth is still exceeding the rate of inflation. But people aren’t seeing that.

Another reason is that a larger proportion of our spending is being taken up by things like utility bills, transport and insurance – the sorts of things we don’t like to spend our money on. That’s why people aren’t feeling wealthy.

However, we saw a 1.5% increase in retail spending last quarter.6 We haven’t seen that sort of growth in four years. And it’s primarily due to the affordability of things like food, clothing and cars at the moment. So it is a case of watch what consumers do rather than what they say.

Q. Should we expect interest rates to start rising soon?

The Reserve Bank Governor has made it clear that interest rates are on hold. He’s not in any rush to lift or cut interest rates. And I think that’s good because it allows people to get on with their life.

Q. What about the property market?

Interestingly, the fastest growing city in terms of home prices at the moment is Hobart. A few years ago, investors were finding Sydney and Melbourne too pricey so they started looking at Tasmania. Now there aren’t enough homes to buy there, so we’re seeing growth in places like Canberra and Adelaide and we’re expecting that growth to spread to Brisbane, Perth and Darwin.

We’re often asked if house prices are going to crash soon. Our belief is that prices will soften over the next 12 to 18 months, as more supply comes on the market, but we don’t expect to see a collapse in the property market.

Q. What should we expect to see over the next 12 months?

Donald Trump was elected on the promise that he was going to cut taxes and increase spending on infrastructure in the US. But so far that hasn’t happened and if there are further delays that could have implications for the US share market and the US dollar, which will in turn affect Australian markets. The same can be said for the North Korean situation, which is very much live at the moment.

In Australia, we’re at the start of an infrastructure boom with a large number of road, rail and tunnel projects already underway around the country. That will continue to support our economy over the next couple of years and should provide us with a degree of confidence.

We believe that inflation will stay low, and that means interest rates will stay low. So, with that in mind, you may have to adjust your expectations about the sorts of returns you’ll receive for some of your assets.

CONTACT MATT WOOD TO DISCUSS THESE TOPICS FURTHER



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