Robust or vulnerable? Experts are divided on Australia’s economic outlook
A customer looks at the price of limes at a fruit stand in Sydney. Australia’s inflation rate rose to 6.1 in June, a 21-year high, according to the Australian Bureau of Statistics.
Lisa Tide Williams | Getty ImagesNews
The Bank of Queensland said it was “fairly optimistic” about Australia’s “very robust economy” – but not everyone agrees.
“We have a very robust economy, which I think when you look at the global challenges, the likelihood of us coming out of it in good shape is quite high,” George Frazis, CEO of Bank of Queensland, told CNBC on Wednesday. .
“The [Reserve Bank of Australia] moved pretty quickly to deal with inflation…that’s why I think there’s a good chance we’ll have a soft landing in Australia,” Frazis said.
Last week, the RBA raised interest rates by 25 basis points to 2.6% and cited the rising cost of living.
“As is the case with most countries, inflation in Australia is too high,” Australia’s central bank said. “Global factors explain much of this high inflation, but strong domestic demand relative to the economy’s ability to meet that demand also plays a role.”
Frazis cited “very high household savings” and “very low unemployment” as drivers of the economy’s strength, despite the pressure on house prices.
“And that’s against a backdrop where house prices have actually gone up 39% over the past two years.”
Corelogic figures, a leading property data provider in Australia, reports that the national value of Australian homes has increased by 28.6% over the past two years. Some capitals have seen price increases of 39% and more.
While the housing sector is very vulnerable to higher interest rates, real housing construction should remain strong for some time…
Chief Economist, AMP Capital
The key to whether or not the housing market is disrupted, according to Frazis, is the unemployment figures, which he said were at an “all-time low”.
australia unemployment rate stood at 3.5% in August, and The household savings rate fell to 8.7% in the quarter from March to June.
“Our view is that [unemployment] is likely to continue and that’s the main driver of whether or not housing is disrupted.”
The bank’s CEO also expressed confidence that Australia is “well-supported” against any kind of cataclysmic event in the housing market, citing that landlords were saving and were ahead of repayments.
However, he maintained that the disruption to Australia’s housing market is “unlikely” to materialise.
No room for complacency
However, not everyone carries the same optimism as Frazis.
According to a Financial Stability Review on RBA, Australia’s higher interest rates will increase borrowers’ debt repayments.
The report pointed out that income growth has not kept up with inflation in Australia and that households are have less ability to repay their debt. In addition, a small portion of highly indebted borrowers with few savings are “vulnerable” to payment difficulties.
“Debt servicing problems will become more widespread if economic conditions, particularly the level of unemployment, turn out to be worse than expected and house prices fall sharply,” the report continues.
In addition, Deputy Treasurer Stephen Jones warned that Australia’s economy is not “hermetically sealed off” from the expected slowdown in the international economy, Sky News reported.
Jones added that the country’s main trading partners are in a “precarious” and deteriorating situation, which will have an impact on Australia.
He also noted that as inflation rises, the economy slows down around the world. This in turn will have an impact on Australia’s growth forecast.
“We just can’t settle for these numbers,” he said.
The Fund for International Monetary Policy recently announced that a third of the world is heading for a recession, which could include economic superpowers like China and the United States
Slower growth, but no recession
An economist suggested a modest outlook for Australia’s economy and predicted that the country’s growth would slow to around 2%, instead of falling into recession.
High household debt in Australia could hurt consumer spending, according to Shane Oliver, chief economist at AMP Capital. However, inflation and lower wage growth also mean that this risk is lower, he added.
Australian dollar banknotes of various denominations are laid out for a photo in Sydney, Australia, Friday, Aug. 4, 2017. High household debt in Australia could put consumer spending at risk, according to Shane Oliver, chief economist at AMP Capital. However, inflation and lower wage growth also mean that this risk is lower, he added.
Brendon Thorne | Bloomberg | Getty Images
“While the housing sector is very vulnerable to higher interest rates, real housing construction should remain strong for some time thanks to a large pipeline of approved but not yet completed home construction projects,” he said. said Oliver.
The economist added that gas prices in Australia had not risen as much as in Europe, and that the fall Australian dollar will provide a buffer against global weakness.
– CNBC’s Tan Su Lin contributed to this report.
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