Important Issues That Harm the Economy

Australia is currently experiencing some good economic fortune with company profits up by up to 20% iron prices up on settled contracts well above the forecast. On the other side spending on various items in the last budget has been held back, when you put this all together you will see a pretty good budget position. The claim of jobs created is skewed as the underemployed has not been factored and is a cause for concern coupled with stubborn low wages.

There is no doubt a position the government sees as an opportunity to deliver a budget before the turn of the tide and claim to be good economic managers, unfortunately it will be short lived with the turbulence around the world and the falling iron ore and property prices. The property market is generally a barometer for the health of the economy.

Here are some very important issues that will cause harm to the economy

  • The trade wars between the USA and China coupled with the Brexit fiasco has the world in limbo and cause for concern. The USA has cut taxes without funding besides exports to China is in trouble. GM announced the closure of several plants and the redundancy of 14,700 jobs, farmers are also being hit with export orders to China. Farmers in the USA are forced into bankruptcy due to the policy of the Trump administration, these are the people he promised great things.
  • Considering China is our biggest trading partner the impact will flow into our economy.and hurt the budget. In addition we have the local issues that is starting to hurt. We forecast a couple of years back the falling property prices in the two largest capital cities namely Sydney and Melbourne. We argued the increase in the value of residential property in these two markets could not be sustained and what we are seeing today is the fall in prices and will continue to fall by up to 20% + . This phenomenon is not evident is other capital cities to the extent in Sydney and Melbourne.
  • Buyers who purchased off the plan have been unable to settle due to the fall in prices and finance as a consequence they have lost their deposits, this increases the supply of properties back into the market.
  • Buyers who purchased properties highly geared with the interest only option will come to the end of this period in the coming year and will be required to pay principal and interest. This will be a real financial burden and will force many to sell and in some cases will be forced to hand the keys to the lender.and walk away.
  • A combination of the above will increase the supply although the demand will remain soft, this has the potential to push developers/builders to the wall.
  • Those who hold onto their properties will be forced to re adjust their spending to meet their loan repayment obligation. It will cause a flow on effect to the retail sector and jobs. Besides wages has been at an all time low even though company profits have been growing steadily. The RBA governor in his last monthly report warned against the continuing low wage phenomenon and the negative impact to the economy.
  • During the last mining boom between 2004 and 2007 the receipts to the budget was $ 344 billion, the then government gave away $314 in tax cuts as a vote buying exercise in addition the sale of assets was $72 billion. By the end of this period the surplus was a meager 7.3% of GDP. (source treasury)
  • The IMF reported the worst spending record by the government of the day. They had outs in taxes has come to bite the economy as they are not sustainable a case in point is the dividend imputation, it cost at the time $500 million today is cost the budget $7 billion and growing. It is our view the time for tax reform is now and hard decisions will have to be made.
  • We can expect a similar path taken by this government to the 2004- 2007 budgets which is not a good option for the economy considering the turbulence around.the world. There is no doubt the fiscal settings must be made a priority to withstand the effects of a potential down turn
  • The national debt has reached half a trillion dollars the highest on record and a small budget surplus achieved by unexpected income due to increased commodity prices will not provide sufficient funds to pay down debt. At the time of writing commodity prices are heading south so the windfall is over.
  • In addition when you factor in the ramifications of the Banking Royal Commission report expected in Feb 2019 the exposure for the four major banks will be enormous costing the banks billions not millions. Further the business model of these banks will have to be changed and profits we have seen over the last decade will be a thing of the past, in addition the share prices will take a hit and investors will bear the brunt.

Best wishes for the festive season and 2019

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