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.
Allan says
I’m not sure if you have heard about the latest prediction/dire warning from Harry Dent about the coming biggest financial crunch of all time.
Philippe says
As an American book writer, Harry S. Dent, Jr. (born 1950) is a merchant of gloom, something that sells books a lot faster than the opposite… and he applies it to the fullest. Especially when it goes against serious economists who don’t try (or need) to sell books and (strangely) mostly disagree. Could it be that Dent is biased, as in ‘subjective’ rather than objective? Only time will tell of course but one may be wise to choose sources well, especially when it comes to trying to make sense of it all with objectivity, like by removing the almighty American dollar from the equation.
con says
You have been a very good boy even if your mother says so! happy Christmas, thanks for all your insightful muses and addictive writing style
zerograv1 says
I can’t agree with this analysis given the known factors that havent been much discussed in this article. The drop in mining construction jobs and the deep retraction in Federal Government financing of job generating projects have a large flow on effect throughout the economy in terms of personal incomes. As we already know, job insecurity and macro contraction of income generating employment sectors like the above two, spills over to a downturn in consumer sales and a drop in committments to take on things like a mortgage. Without considering the impact of these among the mix of other factors your anaylsis looks like a glass half full but unrealistic projection… the graph displaying housing, trade, consumption and investment only displays growth trends, quantum is important here and needs to be considered. For instance, a 5 % increase in a relatively minor contributor to the economy is meaningless and argues nothing. Can you add to the article please but this time include the full set of factors and inputs including relative size as a % share of the economy to your argument?
mark says
Holden’s is the Canary in the mine shaft…..Brush of the significance of this moment at your peril….
? for you….. Why are property prices not exploding in this country (bar Sydney) with 4.7 odd % i rates?
People are slowly realizing on mass that our current resi prop prices in this country are absurd…
Brendan Cocks says
Love your posts mate, keep em’ coming and Merry Christmas!
Ken. says
I see Jon’s information as an (ARK) like warning to all who can’t, or won’t listen to anything but the sound of their own voices. All who didn’t listen, missed the boat, didn’t they. Most of the objections themselves sound false anyway, and are not up to date with the present circumstances. But tell me honestly, what are YOU trying to sell, or do you just love being objectionable and obstinate. Cheers, Ken.
John Chan says
When mining investments and exports were booming, the common analysis is that it did not have a major impact on employment. Now, when the mining investment phase is waning, the doomers say that it matters a big deal in shoring up employment. What about the productivity phase of the mining investment boom, China economy is still holding up, AUD dollar has dropped and the tourism and hospitality sector which is more significant for employment? The cup half full is more persuasive, follow the trend or curve of the up growth.
mark says
Ummmm Ken, i am not trying to sell anything, unlike all of the property experts and spruikers, who all have self interest in high property prices to the teeth….
I am just seeking to create a better Australia…
I suspect that the strong reaction here to just a few pointed questions tells everything that needs to be told….
The simple fact is that Australia’s high land/property prices are hurting Australia.
Alan Kohler himself pronounced this a few weeks ago…. argue with him and me if you like, but that is the truth.
To make Australia better, we need to find a way to limit growth in property prices, to inflation or less.
And then we need to start investing scare capital into productive enterprises/endeavours
Any other outcome will simply make the situation worse….
Unlike probably everyone else here, my fortunes are not tied to the whims of the property market, so i can actually be dispassionate and logical about this…..
Tell me, if house prices grow at 7.5% a year on average for the next 50 years, and wages grow at just 4% a year for the next 50 years, what would that look like? I mean, what would the median Aus house price be, and what would the median wage be?? Could that actually happen??
Hmmmmm good food for thought… obviously something that the property bulls have never thought about…
Have you ever asked what percentage of Australia’s outstanding credit stock has been tied up now by resi property loans? Compared to every other country in the world? Have you ever heard the term capital miss-allocation? Or “crowding out”
Strongly recommend you google some of the above…
Then come back and we can have a meaningful, intelligent discussion
kEN says
Hi Mark, once again, Nobody gives a rat’s arse about the little bloke, it’s all about wanting what the Jones’ have got, instead of demanding builders build basic homes. All car manufacturing assembly factories are the same, and always pushing expensive crap on to us, whether we want it or not. The other problem is a so called whinge that wages are too high. So, come on, you can’t have your cake and eat it too. Get yourself down to earth before you can have an intelligent conversation. Forget about your bullshit statistics and speak in a lingo everyone understands. Wages and prices are going along ok. Google can be on both sides of the fence. The greatest teacher, “The Past” will tell you about prices and wages. Cheers Ken.