Not just 'dumb luck': AMP says Australia's economy is more resilient than many believe

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Recent reports of Australia’s demise have been exaggerated, according to AMP chief economist Shane Oliver.

In a research note on the risks of an economic downturn, Oliver said the Australian economy was more resilient and diversified than it often got credit for.

Oliver’s research was prepared in response to a blog post titled “Australia’s Economy is a House of Cards” by Matt Barrie, CEO of the online crowd-sourcing platform Freelancer.

In defending the health of Australia’s economy, Oliver said concerns about a Chinese economic downturn have also been overblown.

The continuation of the China growth story forms part of Oliver’s view that Australia’s economy isn’t about to fall off a cliff.

He added that other sectors have effectively filled the void left by the end of the mining boom, while the recent cooling in the property market is unlikely to turn into a calamity.

Reliance on China

Addressing the oft-raised concerns around the level of debt in China’s economy, Oliver said key structural differences need to be considered.

“China’s high debt growth reflects its high saving rate (of around 46% of GDP compared to around 22% in Australia), which in turn gets largely channelled through the banking system as its capital markets remain underdeveloped,” Oliver said.

Oliver also said there’s no imminent threat that Chinese demand for Australian resources is about to dry up.

He said fears around Chinese ghost cities are mainly just “scary stories”. In fact, what typically happens is that so-called ghost cities are constructed and left vacant for an interim period before they fill up with people, he said.

Such developments are “part of an effort to decentralise away from crowded cities and the biggest ‘ghost city’ (Ordos Kangbashi) is now almost full”, Oliver said.

Combined with a continued housing shortage in urban areas and underdeveloped infrastructure, Chinese demand for Australian raw materials is unlikely to peak anytime soon.

“Yes, Chinese growth could slow towards 6% over the next few years but I doubt a hard landing any time soon,” Oliver said.

Multi-dimensional economy

While Oliver says Chinese demand for Australian goods and services will remain steady, Australia’s transition away from the mining boom has been under way for around five years now.

But so far the transition has been managed well, and Australia’s 26-year run without a recession isn’t just “dumb luck”.

So why is that?

“The simple answer is that the Australian economy is actually less dependent on mining and hence China than many commentators claim,” Oliver said.

More recently, the economy has found a boost from big infrastructure projects while services exports in tourism and higher education have also grown strongly.

And while Australia shipped as much ore as it could dig out of the ground to China between 2004-2012, that had some negative side effects in other areas of the economy.

“The mining boom basically meant that south-east Australia – and sectors like manufacturing, tourism and higher education along with housing – was suppressed by high interest rates and the high Australian dollar,” Oliver said.

With the Australian dollar declining from parity with the USD since 2013 and interest rates also falling, the recovery in south-east Australia has offset the declines in mining-heavy regions such as Western Australia.

Housing crash

A prospective downturn in the Australian housing market has been in focus lately, amid recent signs of cooling led by a slowdown in the Sydney market.

Given that domestic consumption makes up around 60% of GDP, concerns are centred around the threat to growth stemming from the flow-on effect of falling house prices.

But Oliver says the fundamental economics of under-supply will continue to provide a floor for housing, factoring in strong population growth in Sydney and Melbourne.

In that view, he differs from the conclusions drawn by ANU researchers earlier this week, who said inner Sydney has nearly 6,000 more dwellings than currently required.

Oliver also said Australia’s well-regulated banking sector means average credit quality is relatively high.

The net effect is that a full-scale housing crash isn’t on the cards, unless Australia’s strong run of employment growth comes to an end or the RBA raises interest rates.

That’s an event that looks increasingly unlikely in the near-term, given the bank recently downgraded its inflation forecast and remains concerned about low wage growth.

Oliver concluded that while the fundamentals of Australia’s economy remain steady, domestic growth in the next few years is still likely to lag that of our developed market peers.

“As a result, we remain of the view that while Australian shares have more upside they are likely to remain relative under-performers versus global shares for some time yet and the Australian dollar still has more downside,” Oliver said.

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