In my last post I talked about how the structural and cyclical dynamics in the housing market were shaping up to possibly create a super-cycle boom in 2014…
… but I left out one important thing…
And that’s the economic context. The housing cycle is overlayed on a broader economic cycle, and you can’t make predictions without it. So if we’re talking about what’s happening in property in 2014, we need to take a step back, and have a look at what contribution the broader economic cycle will make.
Now I don’t know if you remember what was going on this time last year. But by comparison, the global outlook we’ve got right now is positively rosy!
Last year the Grinch really stole Christmas, with debt crises (one-after-the-other) in Europe, a budget crisis in America, and a stalling economy in China.
But coming into 2014, we’re breaking out the egg-nog and celebrating a global economy free of the potential triggers of economic meltdown that circled us like sharks through much of 2012. In hindsight, 2013 gave us a lot to be thankful for.
The world has ‘muddled through’ as they say, and so without fanfare or fuss, fears of a meltdown receded, and the globe is, by and large, on a much more stable footing.
News last week that the US was coming to some bi-partisan harmony on debt, this time without the chaotic last-minute brinkmanship games of previous debt-ceiling negotiations, marks a welcome return to a more stable policy environment.
This should mean that government policy is NOT the biggest worry the US economy has, and that’s always a good thing. And when you get past it to what’s going on in the actual economy, there are more and more signs of strength. Employment for one seems to be on a solid upward trend.
And America’s been feeling the cold for quite a while now. So that means that cyclical pressure must be building, and I’d expect 2014 to see some solid cyclical momentum in the US economy.
For example, take the long-run cycle of returns for American companies. Over the last 100 years or so, there have been some clear and stable cycles in returns, with booms lasting about 25 years.
But you can see where we’re at now. We’re about 4½ years into the current boom, and it looks like it’s got a long way to go yet. A stronger US will be a big plus for the world and for us.
Of course a lot of the recovery in the American corporate sector is thanks to Quantitative Easing. And the unwind of QE remains America’s biggest challenge – not practically, but in a way that doesn’t freak everybody out. But a strengthening US economy should give the Fed a bit more room to manoeuvre, and keep the markets from getting spooked.
But while the US is important from a global perspective, it’s less and less important for us. China on the other hand, is quickly making itself crucial. Have a look at this chart of Australian exports by destination. It’s China by a country mile!
But the outlook for China is also a lot steadier than it was a year ago. It’s successfully avoided the ‘hard landing’ that many thought was due, and steps to take the pressure out of a housing bubble have also been relatively successful. And most importantly for us, commodity demand has held up much better than expected.
The rest of the world is also a sunnier place, especially since the run of European debt crises came to an end. In fact, ANZ’s Global Leading Index is the best it’s been in years. After dour readings in 2011 (dark blue) and 2012 (light blue), it’s now firmly on the up and up (the orange line is the index so far this year).
Now I know that there are still risks, and you wouldn’t say the world is booming, but if you’ve been watching the world closely over the past few years, like I have, you would see how different the hymn sheet looks at this year’s end-of-year celebrations. The central scenario is that the global economy will continue to forge ahead in 2014.
And with the global economy playing a supporting role for a change, the outlook for the Australian economy is also striking a brighter tone.
Many were watching nervously to see how Australia would get by with less and less drive from the resources sector. But while investment is coming off the boil, we’ve already seen a rotation towards trade, no doubt helped by the lower Australian dollar in recent months. That’s what this chart here shows:
Investment is taking a breather, while trade growth tags in – just like rock n roll wrestlers.
And even the manufacturing sector, which has been hanging tough for ages, posted its first gain in two years in the last national accounts.
The announcement that Holden is closing shop doesn’t really change this outlook much. Holden probably had very little investment in the pipeline, and what it did probably came from the government’s pockets anyway. And Holden (even including the supportive industries) wasn’t a massive employer.
I did feel a twinge of nostalgia when I heard Holden was pulling the plug, but if no one is buying their cars (for taste reasons as much as anything), then the government’s decision to hold off on extra funding is probably pretty sensible. Too big to fail has been a disaster. I don’t think we should embrace too popular to fail.
But however you argue the toss, Holden’s closure is a political decision, and has very little to do with the current economic climate, which, if the Aussie dollar continues its slide, should remain fairly supportive of the manufacturing sector in general.
And so with support from the global economy, a more robust economic outlook here in Australia will underpin jobs and income growth. This in turn will be a key positive for property in 2014.
So that’s why I’m pipping 2014 will be a big year. We’ve got a cyclical and structural boom, being supported by the best economic outlook in quite a few years.
It’s everything I wanted for Christmas.
I must have been a very good boy.