Bearish or Bullish?

23 Sep

I got an email the other day, about this post. The person asked me “What is your take now on the Aussie Economy with the current market and high property prices in Australia ?”

Here’s my response….

In the short to medium term, we’ll be ok. The problems pointed out in the article are long-term concerns, that will only become immediate concerns if and when commodity prices start to fall.
A big caveat : the data used for the previous blog post doesn’t cover service industries. If they were included, the picture might change completely. I’m pretty sure I mentioned that earlier, though it may have been off-hand. It seems, however, that there are structural problems – too much reliance on industries whose skills don’t carry over into other industries. However, as long as those industries are doing fine, we’ll do fine.

To remain strong in the long-term, we need to ensure that the profits from mining, oil & gas help to build up Australia’s infrastructure, and also help to re-skill our economy. These are some reasons why the mining tax and the carbon tax are good ideas. There are other reasons too, especially for the carbon tax – for example, it’s the cheapest way to mitigate climate change, and a failure to impose some kind of price on carbon would expose us to legal action under WTO rules.

In the short to medium term, well, there are problems in the US and Europe, clearly. The pollies there could solve their problems fairly quickly, but they aren’t currently listening to the right advice. In the worst worst worst case scenario, The US will slide into a deep recession, an the Eurozone will break up. Even if it doesn’t go that far, it seems somewhat likely that there’s more bad news ahead from Europe and the US – however, the extent of this depends on political decisions by handfuls of powerful people, so it’s very hard to predict exactly.

On the other hand, China and India can be expected to keep growing, and growing, and growing.

So, for Australia, in the short-to-medium term, we can expect our economy to grow further – we’ll be dragged back by US & Europe, but pulled forward by China and later India. Some sectors of our economy will continue to experience boom times, others will be dragged down. This means there will be structural changes in the Aussie economy. These would have happened anyway, now they’ll be accelerated. By 2020, we’ll be firmly ensconced in Asia, economically-speaking, since Asia will be the world’s economic powerhouse.

I would expect some Aussie companies to do very well, others to suffer a lot. Since these changes are now happening quickly, the uncertainty (and the trouble in the news) will pull share prices down for a while, meaning lots of bargains to be had on the stock market – especially if you pick the right stocks – in coming months when things seem at their worst.

As for housing, don’t expect prices to get cheaper any time soon. Australia, in the short to medium term, is likely to have one of the strongest economies amongst developed English-speaking countries. At the same time, not much is being done to overcome housing shortages. Uncertainty has been holding prices in check for a while, but as long as people keep wanting to come here, and as long as local pollies don’t do much to increase housing supply, the law of supply and demand will push house prices up.

Hope that helps!



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