13 reasons why the Aus economy is flying

Why do some people just have to spoil optimism and go for the negative? Every time I get on a roll with all the good things that are happening with our economy, some killjoy brings up the subject of debt. If it’s not the Federal Government debt, it’s household debt and those in the “we’ll all be ruined” group will warn about the dire consequences when interest rates rise.

Debt? What debt?

In case you’re wondering, our Government debt to GDP is 41%, USA 106%, UK 89% and the EU 89%, while here in Oz we’re at 41%. So let’s downgrade that concern for now, especially when the Budget Deficit is tracking downwards, as news stories this week reported.

Down, down, debt is down

And if you missed this as well, the Budget Deficit for 2016/17 was $33.15 billion, or 1.9% of GDP. The budget deficit was a $4.4 billion improvement on the $37.6 billion deficit forecast just four months ago.

“The annual deficit was the smallest in four years,” observed CommSec’s chief economist Craig James. “There has only been one smaller deficit in the past eight years. On a rolling monthly basis, the deficit was the smallest in 39 months.”

Also read: More signs of serious trouble in the Australian apartment market

We’re heading in the right direction!

The debt feeds the Deficit, so we’re heading in the right direction — have faith.

Housing too hot to handle?

Meanwhile Paul Dales, the chief economist at Capital Economics, says once you adjust for the fall in interest rates, the local housing market isn’t as overvalued as some experts think.

One reason why house prices have been called overvalued is the current house price to earnings ratio of 5.8, for all capital cities, that is way higher than the historical average of, since 1980, around 3.6.

Tell the whole story!

But as Dales told the AFR, that this argument doesn’t take into account the “permanent decline in interest rates” that means “buyers are now willing to accept a much lower annual return from housing”. As interest rates fell and money became so cheap households were emboldened to take on more debt.

And when will the first rate rise be?

By the way, he thinks the first interest rate rise won’t happen until late 2019, so debt worriers, who think rising rates will reveal a terrible debt time bomb, might find that the opposite is true.

What if the opposite was true?

And on that vein, what I want you to do is imagine an economics story that presents a terrible threat to the material well-being of a large group of Aussies, then flip this scary scenario as if to ask: “What if the opposite is true?”

Also read: 11 things you need to know about interest rates

Thinking different

A few years back I interviewed a speaker on innovation, who made the point that a lot of renowned business builders and general high achievers have thought this way to create a competitive advantage.

Then along came Uber…

I’m sure most of us never believed the infamous taxi drought at 2pm in Sydney, when business lunch-goers were finishing up lunch and were looking to get back to the office or even go to another meeting across the city, would ever end. Then along came Uber and the opposite is true.

Who would have thought that free-to-air TV stations would be undermined by pay TV operators and then these would be challenged by the likes of Netflix, Stan and Apple TV? A computer company becomes a TV station? Sure!

Again, the opposite is true.

I hate being scared!

These wild and wacky thoughts came to me as I read a typical piece of scary economic commentary in a major newspaper. Let me go through the worrying news and effectively pose the question: what if the opposite is true?

Again, tell the whole story, not just bits

The basic argument in the story was that “Home buyers who stretched themselves to enter the property market while interest rates were at record lows, could be “vulnerable” to economic shocks, a senior Reserve Bank official says.”

But when I investigate whether the opposite could be true, I find that the RBA’s Michelle Bullock did also say:

• These borrowers were currently managing their debts well.

• Bank lending standards have improved but

• “With my worry hat on, high levels of debt do leave households vulnerable to shocks.”

• And she did add, importantly, that: “her remarks did not represent the RBA’s main view on what would happen, but the risks – ‘what might keep me awake at night’.” (SMH)

• Household debt to disposable income is at a record high 190% but: “Even so, Ms Bullock said moves to clamp down on higher risk mortgage lending in recent years had helped to strengthen the resilience of the banking system to a financial shock.” (SMH)

Sure, there could be problems but…

The guts of the story is really that the RBA fears the possibility of an external shock, which could drive up world interest rates, or, alternatively, low wage growth prevails, as the RBA needs to raise interest rates. And that could put a lot of households in trouble but it is a lower grade fear for the central bank. But on the scary scenario, what if the opposite is true?

Also read: 7 signs you’re rich, even if it doesn’t feel like it

Rates up early 2018?

Let’s take the view of HSBC’s chief economist, Paul Bloxham, who thinks interest rates will rise early next year. He sees stronger economic growth for the Oz economy than most, with wages rising. His economic scenario is more positive than most economists but the ANZ and NAB economics team has recently changed their view on the economy to say that rates would rise in mid-2018. And they wouldn’t predict that if they think the economy will be struggling.

By the way, this is the RBA’s view that growth will be 3% plus, which is better than what many economists are predicting!

Or late 2018 or even 2019?

And while many economists think rates won’t rise until late 2018 or early 2019, nearly every one of them thinks rates won’t rise quickly, so these vulnerable households might need two to three years before they could be exposed to a debt trap. And by then, if there aren’t decent pay rises, our economy could be stuffed!

But the AFR doesn’t see it that way, with a recent story entitled: “Australia’s next boom has barely started” with the infrastructure spending ahead set to be one and half times the mining boom!

Change the thinking

I’m not saying I’m right but I am looking at the possible disaster stories great journalists often peddle and I’m just asking the counter-question: what if the opposite is true?

And change your wealth!

You know, many people fear the stock market because of crashes but in fact, with the right portfolio of shares that can do as well or even better than the S&P/ASX 200 Index, history says your portfolio should:

• Go up about eight years out of 10;

• Return about 10% per annum; and

• Half of that return will come from reliable dividends that might fall but not crash in a stock market crash.

What is remembered and feared about investing in stocks is that it’s a terrible risky wealth-building play but, over a decent amount of time, the opposite is true.

Peter Switzer is the founder of the Switzer Super Report, a newsletter and website for self-managed super funds. www.switzersuperreport.com.au