Weakness in Australian economy persists despite property recovery

Old images of Sydney at the site of a new development in the city. Outside of real estate, Australia's economy is struggling, with gross domestic product growth at decade lows and more companies filing for bankruptcy. PHOTO: AGENCE FRANCE-PRESSE
Old images of Sydney at the site of a new development in the city. Outside of real estate, Australia's economy is struggling, with gross domestic product growth at decade lows and more companies filing for bankruptcy. PHOTO: AGENCE FRANCE-PRESSE

SYDNEY • When Mr Michael Jiang scored a liquor licence four years ago, he had hoped it would help to drive more sales at his struggling small grocery business in Sydney.

Fast forward to the present and he finds himself wrestling with new challenges, as stingy consumers and price wars have done little to boost earnings in an economy that is growing at its slowest pace in a decade.

Moreover, even a welcome revival in the property market has served only to highlight a conundrum for policymakers, as the "wealth effect" of rising home prices has hardly been felt across the rest of the economy.

This not only means that sales at businesses such as Mr Jiang's continue to run on a low boil, but it also raises the risk that already-high household debt could worsen without the broader recovery that Australia's central bank is trying to engineer with lower rates.

"The liquor business is kind of my silver lining," Mr Jiang said of the high-margin category in his corner shop in Pyrmont, an inner-city Sydney suburb.

"Without that, I'd have closed down years ago," he added, underscoring the persistent weakness in Australia's economy, even as it is set to enter its 29th straight year of recession-free growth.

"People don't want to spend. They are tightening their wallets to save for a house because interest rates are so low now."

Economists overwhelmingly agree that Australia's ruling centre-right coalition must embark on an expansionary fiscal programme, but Prime Minister Scott Morrison is wedded to the idea of delivering a surplus this year.

The Reserve Bank of Australia (RBA), which delivered back-to-back rate cuts in June and July, has its work cut out for it, given that the official cash rate is already at an all-time low of 1 per cent.

That leaves it with limited room to stimulate growth, though it is still in an enviable position compared with the likes of Japan and the euro zone, where policymakers have been forced to adopt negative rates to juice their economies.

MORE STIMULUS

The RBA easings have boosted the housing market, with mortgage approvals up 5 per cent in July - the strongest in four years - while auction activity in the biggest markets of Sydney and Melbourne has been solid after two years of tepid sales.

"It's too early to say whether the boom times in housing will return, but the potential is there," said Ms Miriam Sandkuhler, Melbourne-based chief executive officer of Property Mavens. "If we start getting high auction clearance rate against high volumes, it's a sign the market is moving swiftly again."

Analysts and investors widely expect two more rate cuts by the RBA to 0.5 per cent by early next year, though there is growing doubt over how effective further easing will be when rates are already so low.

Economists overwhelmingly agree that Australia's ruling centre-right coalition must embark on an expansionary fiscal programme, but Prime Minister Scott Morrison is wedded to the idea of delivering a surplus this year.

A return to surplus will be lost on many, as activity outside of real estate is hardly encouraging - gross domestic product growth has slowed to decade lows, retail spending is contracting, car sales are collapsing, and consumer and business confidence is falling.

Policymakers will also be concerned about the increasing number of Australian companies filing for bankruptcy.

Government data shows that the number of companies entering external administration jumped by a staggering 15 per cent in the quarter ended June. In July, that number surged to the highest since November 2015.

"It is concerning to see minimal impact from the government's tax cuts and interest rate cuts," said Ms Diana Mousina, a Sydney-based senior economist at AMP Capital.

"We think that more policy stimulus is necessary to lift Australian growth and inflation."

ASSET BUBBLE?

Growth in the A$1.9 trillion (S$1.8 trillion) economy slowed sharply in the second half of last year, largely because Australia's indebted households cut spending on everything ranging from clothing to footwear to eating out.

That leaves policymakers walking a tightrope, as any over-exuberance in the housing market could further push up the household-debt-to-income ratio in Australia - which, at 190 per cent, is already among the highest in the world.

S&P Global Ratings research this month showed that mortgage arrears jumped across the Australian residential mortgage-backed securities sector over the past 12 months. The deterioration was most pronounced for loans more than 90 days overdue.

With the corporate sector struggling and wage growth persistently weak, credit quality could come under further stress, S&P said.

Reflecting these concerns at a meeting of global policymakers late last month, RBA governor Philip Lowe said: "Monetary policy cannot deliver medium-term growth. We risk just pushing up asset prices."

REUTERS

A version of this article appeared in the print edition of The Straits Times on September 17, 2019, with the headline 'Weakness in Australian economy persists despite property recovery'. Print Edition | Subscribe