Australia – Multiple Economic Warnings

The warnings about the Australian economy came thick and fast last week and the front page of today’s AFR continues with the headline “Interest-only loans could be 'Australia's sub-prime'”

“High-risk mortgage loans to young families, professionals and other over-extended borrowers amounting to more than six times household incomes could wipe out 20 per cent of the major banks' equity base, institutional investment fund JCP Investment Partners has warned.”

That’s a pretty scary prospect whether you are a home owner or not as you are probably invested in banks through super etc.  It’s yet another argument for getting your own Self Managed Super Fund and taking control.

Last week Credit Suisse warned the RBA will need to cut rates multiple times this year due to slack in the economy.  Last week we saw the unemployment headline figures show a larger than expected increase in employment and the unemployment rate drop to 5.7%.  However that 37,400 jump was solely due to part time jobs, up 49,000 against a fall of 11,600 full time jobs and seeing a further decline in hours worked and stagnant wage growth.  Credit Suisse go on to say:

"Employment quality was even more questionable considering statistical distortion. If we were to remove upward statistical biases, the decline in full-time employment in April would have been even greater than officially reported."

These two factors – rampant household debt in a bubble like property market and weak earnings fundamentals – are a concerning mix.  Professor Steven Keen of Kingston University last week warned that “Australia has simply delayed its day of reckoning,” as we escaped the GFC relatively unscathed on the back government interventions including the first home buyer grant that inflated property prices and which the government is now afraid to stop.  As he puts it:

“The housing bubble makes the politicians look good because A, people are feeling wealthier, and B … people are borrowing money to spend,” he said.

“Then the government runs a balanced budget and looks like it really knows what it’s doing”

From news.com.au:

“His latest book, ‘Can We Avoid Another Financial Crisis?’ argues Australia, along with Belgium, China, Canada and South Korea, is a “zombie” economy sleepwalking into a crunch that could come between 2017 and 2020.

“Both [Australia and Canada] will suffer a serious economic slowdown in the next few years since the only way they can sustain their current growth rates is for debt to continue growing faster than GDP,” he writes.”

We often remind you that per GDP Australia has the highest personal debt in the world.  The OECD published a comparison against net disposable income showing Australia as 4^th worst in the world (behind Denmark, Netherlands and Norway).  Of note however, its data from 2015 and we have since seen more debt but stagnant income growth so it’s probably worse again now.

It also casts serious doubt over the latest budget whose forecast of future surpluses heavily relies on a miraculous and robust return to wage growth based only on the science of hope.  That didn’t escape Standard & Poors who, whilst maintaining our AAA rating this time, confirmed their outlook “remains negative”.  From the AFR:

“The body [S&P] says the government's projected return to a balanced budget in 2020-21 is eight years later than the previous government's 2010 forecast for a return by 2013.

"If achieved, it would come more than 10 years after the global recession pushed the central government budget into deficit," the agency said in a statement on Wednesday. 

"This substantial delay in fiscal repair, and the risk of further delay, raises our doubt over the ability of the Australian government to meet its fiscal objectives."” 

Wage growth is one thing, GDP growth another.  But even there on Friday we had J P Morgan substantially downgrade its forecast for Australian GDP for 2017 to 2.1% from 2.8%.  That is well short of the budget’s assumptions of course, but budget’s these days are less budget, more political propaganda.  An investment portfolio banking on the ‘lucky country’ cruising through another crisis is a dangerous one indeed.