Damien Boey, a research analyst at Credit Suisse, has warned that economic growth in Australia could slow quite sharply next year, raising the prospect that a slowdown could be immient.
Boey expects the recent growth spurt driven by strong infrastructure investment, could fade in the first half of 2019, and the risks associated with housing construction and household spending from the downturn in real estate could signal that the Reserve Bank of Australia's rate hike cycle would have to be put on hold.
“Our view is that the economy is overshooting,” Boey said.
“We believe that growth will eventually slow as timely leading indicators [such as PMIs] are suggesting.”
Boey said infrastructure investments had driven the recent surge in economic activity.
“We think that the [economy] is still being supported by infrastructure,” he said.
“The latest Access Economics data for Q3 suggest that growth in the stock of infrastructure spending has re-accelerated. And recently, project spending growth has been remarkably positively correlated with the cycle in domestic demand.”
While actual infrastructure investment has been substantial, Boey did not expect the trend to last due to the lack of new projects in the pipeline.
“In 2018 to date, actual project spending growth has accelerated, even as the project pipeline has thinned out,” he said.
“It is in this sense that we think infrastructure spending growth has been overshooting, contributing to the overshooting we are also seeing in domestic demand growth relative to leading indicators,” Boey added.
“However, the more growth in spending we experience today, the more we also eat into future growth, unless policy makers are able to adequately top up the project pipeline.
“As the saying goes, ‘serenity now, insanity later’.”
The boom in infrastructure investment in 2018 is creating a high benchmark for growth rates in 2019, a significant factor Boey believes will morph into a slowdown next year.
“Our concern is that the economy is very much driven by housing and consumption,” Boey said.
“Indeed, the multiplier effects of housing on the rest of the economy are very large. In this respect, conditions do not look particularly healthy.”
And, if Boey is correct about infrastructure spending cooling next year, this could materialize into a significant issue for households that could further compound the real estate slowdown.
“Infrastructure spending is providing a circuit breaker between falling house prices and the aggregate spending. Employment growth has been remarkably resilient, allowing households to absorb negative wealth and credit effects from housing downturn,” he said.
“But if the infrastructure pipeline is not topped up in a timely fashion, the risk is that the public spending impulse will fade, employment growth will slow, and private sector de-leveraging forces will take over.”
This all comes at a time of declining home prices in many regions of the country, Boey also warns this could see “residential investment fall materially.”
Boey, like many other forecasters, thinks the Sydney-led national housing downturn could result in a crash.
On Thursday, we covered yet another gloomy report, this time from UBS, who warns housing prices in Australia could fall as much as 30% in a deep recession scenario.
UBS analyst Jonathan Mott assembled five different scenarios to predict the direction that Australia’s housing market could go. The worst case includes the first recession in 27 years, a 30% collapse in house prices and widespread litigation against the banks for mortgage mis-selling. The bear case would also include the central bank cutting rates to zero before embarking on its own version of quantitative easing, the suspension of dividends and equity raisings from the big banks.
Mott thinks that current conditions are already reflecting the very real possibility of a housing correction and also warns that risk of a credit crunch "is real and rising."
Mott stated: "The rapidly deteriorating housing market is a signal of even tougher times ahead. The housing credit squeeze experienced over the last six months is expanding. The outlook for the banks has not been as challenged since at least 2008."
As a reminder, the Australian household debt to income ratio has ballooned to shocking levels over the past three decades as Sydney is ranked as one of the most overvalued cities in the world. According to the Daily Mail Australia, credit card bills, home mortgages, and personal loans now account for 189% of an average Australian household income, compared with just 60% in 1988:
Australia’s economy is a house of cards. It seems that multiple analysts have realized the party could stop in 2019.