A last policy strut…
Australian Government economic policy has reached an end game of sorts. Federal fiscal policy is being tightened, as efforts to preserve our credit ratings hold back the aspirations to kick-start much needed infrastructure spending. Monetary policy has had to do most of the work in sustaining economic activity, to the point where there is now little left to give.
The change of government in the United States is bringing a change of tack, as the new President is expected to follow through on a commitment to kick-start growth through tax cuts and infrastructure spending. Markets are now factoring in higher interest rates and some tightening of U.S. monetary policy.
Some small, gradual increases in our variable mortgage rates should be expected during 2017, as the global cost of debt edges higher. This process would provide a drain on household spending. Our expectation is that a higher cost of debt will help to dampen the rate of apartment development in Australia, contributing to slowing of economic growth in 2018.
There are reasons to expect that the Australian cash rate will be reduced further, bringing this closer to the U.S. Fed Funds rate. In response, the Australia dollar should depreciate further, moving down to US$0.65 by the end of 2017.
A weaker Australian dollar would bring short-term positives in terms of demand for new apartments & houses, as it makes our property cheaper in U.S. dollar terms. The medium-term effects are likely to ripple out for several years. Currency depreciation would be a boon for the tourism industry, tertiary education, and agriculture & food processing. This environment would be much more supportive of jobs growth in regional towns where there is an overlap between the tourism & agriculture industries. If there also an inward movement of retiree households, seeking to cash in on the capital gains of their family home, then this timing becomes even more worthy of attention.
The combined value of national agriculture and food product manufacturing exports is greater than coal mining (as shown in the chart below). There is enormous potential for expansion of these sectors, although the vagaries of weather make for uncertainty in the path of growth.
Source: ABS, MacroPlan
The overseas tourism boom is already generating development of new hotels in the capital cities. A return to local beach holidays will inject profits into regional tourist operators, and contribute to greater investment in new accommodation.
On the other hand, retail businesses will most likely have reduced profit margins, as they tend to resist price increases on imported goods.
Overall, we expect that a weakening Australian dollar will have pervasive effects on property sectors. A continuation of overseas tourism growth will amplify the hotel industry in our main destinations. There is likely to be more support for regional residential property, which has clearly underperformed for the past decade.