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6 reasons we’re NOT going into recession

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There is lots of concern at the moment that Australia is going to fall into recession, but will it really happen?

Many commentators are worried that the current crisis in consumer confidence will impact economic growth.

They suggest that the negative wealth effect of falling house values could lead to a cut in consumer spending and that this plus the collapse in construction activity (one of our biggest employers) at a time of overseas economic headwinds could combine to create the perfect storm which could lead to Australia into recession.

I think Australia will have a recession… one day – but not any time soon!

Here are 6 reasons why;

1. Despite the various political issues and the trade wars creating some downside risks, the world economy and the economies of our trading partners are performing well.

2. Australia’s economic growth is forecast by the RBA to be around 3 per cent over 2019 and 2.75 per cent over 2020. This should be enough to see further gradual progress in lowering unemployment.

3. We’re creating more jobs. Last year alone 212,000 full time jobs and 51,000 part time jobs were created.

4. Unemployment is falling – at 5 per cent it is now the lowest it has been since 2011. In NSW and Victoria (our two economic powerhouses) unemployment is around 4.25 per cent. With the number of job vacancies at a record high, unemployment is forecast to drop further to 4.75 per cent over the next few years.

5. There are finally signs of wages growth ahead

6. A gradual pickup in underlaying inflation is forecast as spare capacity in the economy diminishes. Underlying inflation is now expected to increase to about 2 per cent later this year and to reach 2¼ per cent by the end of 2020.

But there are other positive signs

  • The next Federal Budget is likely to deliver a surplus for the first time in years.
  • Our population is growing strongly – albeit a little slower than before. Australia’s population grew by 390,500 people or 1.6 per cent during the year ended 30 June 2018. Natural increase and Net Overseas Migration contributed 39.4 per cent and 60.6 per cent respectively to total population growth for the year ended 30 June 2018
  • Infrastructure boost – We have a very strong infrastructure investment pipeline mainly coming from State Governments.
  • The next Federal Budget is likely to deliver a surplus for the first time in years. Australia’s population grew by 390,500 people or 1.6 per cent during the year ended 30 June 2018. Natural increase and Net Overseas Migration contributed 39.4 per cent and 60.6 per cent respectively to total population growth for the year ended 30 June 2018.
  • The Australia dollar is likely to stay low for some time yet and this is good for our export industries.
  • Our Mining Sector is on the improve assisted by our falling Australian Dollar and increasing mineral prices. This means the big economic drag we have seen from the downturn of the mining sector over the last five years or so from falling mining investment is starting to fade.
  • The Agricultural Sector on the improve – and if we play our cards right we could become the Asian food bowl.
  • Tourism is booming.
  • International student education is continuing to be a huge “export industry” for us – up 17 per cent last year.

Positives in our housing markets

And while clearly not all the news is good for our housing markets there are clearly some positives that the media tends to overlook.

  • Interest rates are low and are likely to fall further this year as the RBA tries to stimulate our markets. The good news is the RBA has plenty of ammunition up it’s sleeve but there is always the question of whether banks will pass on interest rate cuts to their customers, and whether they will loosen their tight lending criteria.
  • Residential vacancy rates are tightening.
  • Rents are likely to rise.
  • The underlying demand for property is still strong but hindered by consumer sentiment and tight credit.
  • There is clearly oversupply of new apartments in many locations but the pipeline is slowing down.

The big unknown

Clearly we have a mixed bag of economic fundamentals that will interplay on our economy and our housing markets.

While these are relatively easy to quantify, the big unknown will be consumer sentiment and currently that is low and unlikely to change until the outcome of the federal election is known.

Having said that, those investors who take a long term view and recognise that all economic downturns are temporary, while the increase in value of well located residential properties in our capital cities is permanent, will be able to take advantage of the property investment opportunities the current buyer’s market is delivering us.

Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Update blog.

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