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Intro: Welcome to the monthly podcast of Australian Property Investor, Australia’s most trusted and widely-read property investment magazine. For information on how to subscribe to either our print or online magazine, as well as other great property investing information, please visit our website, www.apimagazine.com.au
Shannon Molloy: Hi listeners, welcome to this month’s podcast. I’m Shannon Molloy – deputy editor of API magazine and today we’re talking about the economy; where we’ve been this year and what’s in store for 2013.
The performance of our property markets is driven by many factors – consumer sentiment, fiscal policy and what’s happening in the broader economy, to name just a few. To shed some light on what we can expect next year, today we’re joined by leading economist Su-Lin Ong from RBC Capital Markets.
Su-Lin, thanks for joining us. Firstly, did the performance of the Australian economy in 2012 largely meet your expectations?
Su-Lin Ong: We’d probably have to say the economy, particularly in the first half of 2012, was stronger than we’d anticipated. We’re expecting growth for calendar year 2012 to be around 3.5 per cent, but it’s very much driven by a stronger first half which is giving way to a weaker second half.
The first half of the year, consumption in particular proved a little more resilient. Cap-ex (capital expenditure) was also pretty buoyant. That’s definitely giving way to a softer pace of growth and we think the economy is moving towards a more sub-trend pace at the moment. That’ll continue into 2013.
Shannon Molloy: It was a year of highs and lows in many regards, a bit of a mixed bag. How would you describe the past year from an economic sense?
Su-Lin Ong: I think we’d characterise 2012 as a bit of a tale of two-halves – that stronger first half, which is now easing, and the underlying growth pulse which is moderating in half two.
Overall, I think growth this year will be about 3.5 per cent, which is above trend. That decent number for the year as a whole is masking a bit of weakness in the second half, as I said, which we expect to continue into 2013.
Shannon Molloy: There’s a lot of talk about the so-called ‘end of the mining boom’. What’s your take on that?
Su-Lin Ong: I think the debate really has to be broken down into the prices side as well as the actual capital expenditure side.
There’s no doubt the boom in commodities prices peaked some time ago. That’s probably best captured by the terms of trade – that peaked about 12 months ago and has really declined ever since. We expect a drop of about 12 per cent this year and a further six per cent next year, and that’s driven primarily by the decline in commodity prices, particularly in coal and iron ore.
The boom is over in terms of some of the high commodity prices, but when we look at the resource-related capital expenditure, that continues to be pretty strong. We’d expect another double-digit year of business investment in terms of capital spending and then that will peak out late next year and into 2014.
The cap-ex side remains a very strong contributor to growth right now.
Shannon Molloy: When it comes to 2013, what are some of those main indicators showing?
Su-Lin Ong: I think as we move into year-end and into 2013, there are a few indicators we’re watching very closely. The consumer index is showing more signs of moderation recently. We think the trend in monthly retail sales has softened up and I think households face a number of challenges, particularly the weakening in the labour market that we think is occurring.
One of the key indicators we’re watching is everything from the official labour market data through to vacancy surveys as well as the employment components of business surveys. We’re seeing a real decline in vacancies, which is pointing towards further moderation in growth.
I think we go into the end of the year with a bit of a moderation occurring in the consumer, a softer underlying belly to the labour market, a housing sector which is showing some signs of stabilisation but in terms of construction continues to experience a drag on activity.
I think the outlook is for further moderation from here on in.
Shannon Molloy: Looking abroad, Europe remains a big wild card and despite some improvement recently, short-term prospects both there and in the US and UK, and even China, continue to cause some concern. How much does the global economy impact us here in Australia?
Su-Lin Ong: It’s very significant. At the end of the day, Australia is a small and open economy that’s highly leveraged to the global growth cycle. It’s no coincidence the Australian cash rate tends to track some sort of proxy for global growth and the growth outlook.
We’ve seen over the past few years a transmission through credit channels and confidence channels, probably quicker than through the trade channels. There’s no doubt that when we see ongoing headlines about the fiscal cliff in the US and uncertainty there, about the difficulties in Europe and the lack of solutions, that it transmits through very quickly in terms of confidence, in terms of credit and even in terms of equity markets.
The global economy is definitely important via trade linkages as well as confidence, credit and equity markets.
Shannon Molloy: Here in Australia, are we likely to see an improvement in confidence any time soon?
Su-Lin Ong: That’s an interesting question. There’s no doubt business confidence has languished to levels that are well below the long-run trend, and there are a number of factors (causing) that. I think the challenges to the global economy, particularly to Europe, and the uncertainty that implies is feeding through to business confidence. There’s also some uncertainty over the policy framework in Australia, especially as we go into an election year next year and whether certain policies will be revoked or not. It’s hard to see a big bounce or sustained bounce in business confidence anytime soon.
For consumers, we’re starting to see a bit of an improvement of late and maybe that’s a reflection of the fact that 150 points of rate cuts from the RBA is finally starting to get a bit of traction. Really for consumers, I think the key is going to be the outlook for the labour market.
Shannon Molloy: You spoke a little earlier about that bounce in property prices we’ve seen in the second half of 2012. What’s your forecast for the housing market in 2013?
Su-Lin Ong: I think it’s important when we talk about housing to distinguish between housing activity and construction, and house prices. On the prices side, I think we’re in for a period of flat growth, maybe small increases next year if we get further cuts to the cash rate – which we do expect – in half one.
I think we’ll see a little bit of support for house prices and we’re unlikely to see declines, declines of five to six per cent year-on-year that we were seeing in the first half of this year. There are some supportive factors there, not least of which is lower mortgage rates and the likelihood of even further cuts.
In terms of activity, we’d have to argue that most of the leading indicators of housing activity and construction still remain quite weak. They’re not signalling any big upturn in construction next year – in fact, we expect it to remain a drag on activity through to at least the middle of 2013.
Again, there are some supportive factors in place and some senior RBA officials have talked about that recently. We think it’ll be the second half of next year when housing starts to contribute to growth once again.
Shannon Molloy: And finally, are you more optimistic about 2013 than you would’ve been this time last year looking at 2012?
Su-Lin Ong: Probably not. We’re looking at more moderate growth in 2013 compared to the current year so we think the softer trend will continue. We’re looking for growth next year a little under two-and-three-quarter per cent. Now, that is below a long-run trend rate.
Housing is likely to drag on growth for at least the first half of the year. We expect consumers to remain reasonably cautious and the labour market to weaken. The odds are the peak in the investment and cap-ex boom will be in sight by the end of next year.
We’re a little more cautious and we remain of the view that global growth is unlikely to pick up significantly next year. There are a number of structural headwinds in both Europe and the US, and there remain a lot of risks.
I’d say we’re not extremely optimistic and it’s probably a more cautious outlook.
Shannon Molloy: Another interesting year ahead by the sounds of it. Su-Lin, thanks very much for your time.
Su-Lin Ong: No worries, thanks.
Shannon Molloy: To meet buyers who are more than confident about the prospects for property, check out our cover story in the January issue of API magazine. Five incredible investors reveal how they’ve built their portfolios, like Dean Zarif who quit his job to focus on a $3.3 million investment kitty. Or Toni Caldwell, who got started with a $1.9 million profit in just a year.
Plus, we list the 42 suburbs where you’ll find property priced under $200,000 – including 20 in or near capital cities. We’ll also tell you the right and wrong ways to buy an investment property and introduce a couple who gained a $500,000 equity boost in 15 months.
All that, your chance to win $5000, and much more in the new issue of API magazine. For subscriptions and more information, visit our website at www.apimagazine.com.au.
I’m Shannon Molloy, thanks for listening.