Building Investment Decline Poses Problems for the Australian Economy

Before getting stuck into today’s Markets and Money, I want to fill you in about something that’s been going on behind the scenes here at Port Phillip Publishing…

Next week, our company takes its first dive into full-fledged investigative journalism.

But, as you will see, we’re doing it our way.

As independent journalism collective writes:

Investigative journalism is at risk. Many news organizations have increasingly come to see it as a luxury. Today’s investigative reporters lack resources: Time and budget constraints are curbing the ability of journalists not specifically designated “investigative” to do this kind of reporting in addition to their regular beats. New models are, therefore, necessary to carry forward some of the great work of journalism in the public interest that is such an integral part of self-government, and thus an important bulwark of our democracy.

Is Port Phillip Publishing — with its complete independence from industry, government, shareholders and advertisers — part of this new model?

Next week, we’re about to find out!

In short, we will be releasing our very first 88-minute Special Investigation.

It’s years in the making.

And all I’m allowed to say at this stage is this: The investigation, helmed by our own Vern Gowdie, blows the lid on a 41-year-old Australian mystery.

Except that this whodunit has very real implications for your wealth and freedoms in 2017.

Stay tuned…

Back to the market action… Oil was the winner again in overnight US trade. Late in the trading session, West Texas Intermediate crude had jumped more than 3.5%, adding to yesterday’s 8% rise.

But it didn’t do that much for the market overall. The Dow Jones was up a bit, while the S&P 500 fell slightly. At the time of writing, futures point to a flat start for the Aussie market today.

But that’s not surprising, given yesterday’s strong showing on the ASX. Energy stocks propelled the index higher. They had their best day in years, and should receive good support again today.

If you’re interested in getting some unique energy exposure (and avoiding some of the debt-laden majors), check out my recent report that examines the coming East Coast energy squeeze in Australia, while identifying who the winners might be.

Despite the recent general bullishness, it’s not all rainbows and lollipops, though. As you can see in the chart of the ASX 200 below, the market has put in a strong rally since Trump won the election, but it’s still below the August high.


Source: BigCharts
[Click to enlarge]

And while everyone is getting excited about the prospects for a resurgent US economy, the Aussie market faces major headwinds going into 2017.

Investment data released yesterday for the three months to September was worse than expected. The Financial Review reports:

Economy-wide investment slumped at almost twice the pace that was forecast in the September quarter, with an unwelcome decline in non-resources spending pointing to a weak 2017.

Total spending by companies on new buildings and equipment slid 4 per cent from the previous quarter, to be down 13.7 per cent from a year earlier, the Australian Bureau of Statistics said on Thursday.

Most concerning, however, are signs that the nascent rebound in non-mining investment has run out of steam. Capital expenditure by services companies fell 1.9 per cent in the quarter.

Combined with recent data showing a sharp contraction in building approvals, the latest figures are not good news for the economy in 2017 as they imply the drivers of growth since the mining boom ended four years ago are themselves starting to flag.

Here’s the deal…

Investment isn’t a huge part of the Aussie economy. But it’s vitally important because investment creates jobs, which, in turn, leads to increased consumption, credit creation, tax receipts, etc.

Over the past few years, the economy has been working off falling investment spending in the resources sector. This has been a drag on growth, and a major reason why the RBA cut interest rates so vigorously from late 2011.

The aim was to ignite a housing construction boom to offset falling investment in the resources sector. That worked a treat, and now the major East Coast cities are facing an oversupply of apartments.

I don’t see it as being a big deal in Sydney or Melbourne, as population growth over the next few years will soak up any excess.

But the shorter-term issue for the economy is that building investment is beginning to fall.

Therefore, investment spending is likely to either detract or add very little to growth for the time being.

That puts the pressure on household spending to prop up economic growth. Which is going to be difficult if the RBA is done with its interest rate cuts.

Household consumption has underpinned economic growth in Australia over the past few years. Falling interest rates have pushed up house prices, and the wealth effect from this (or, more accurately, the debt effect) has led to an increase in spending.

Interest rates are now on hold, so there won’t be any additional monetary stimulus unless something goes pear-shaped in the economy. That means household spending will continue to slow (as rising debt levels continue to eat into purchasing power) at the same time as investment spending comes under pressure.

This concern will at least keep the RBA from raising rates anytime soon. But the lack of growth impetus will probably force the government’s hand in 2017; as a result, they’ll open their purse strings (even more) and announce some sort of Trump-lite infrastructure package.

The thing holding them back right now is the political risk of losing Australia’s AAA credit rating. That would almost certainly happen if they caved in on their commitment to contain government deficits.

It’s not a good look for an ‘economically responsible’ government to be the one to lose a ‘prized’ credit rating. But if you’re going to do it, you should do it at the start of an election term, rather than at the back end.

The problem with Australia’s government deficit is that it is ‘structural’. That is, our onerous middle class welfare system means that spending increases are baked into the cake. Without a decent pick-up in tax receipts, these spending increases will translate into rising deficits.

Unfortunately, this situation restrains the government from increasing spending on infrastructure, which, if done correctly, is actually productivity-enhancing and good for the economy in the long run.

If the economy does hit a rough patch next year, which looks likely, the government will step up and spend more. In today’s ‘money grows on trees’ world, politicians (and central bankers) think it is their duty to avoid recessions.

So expect more recession-fighting rhetoric next year. Only this time, the leading actor will be the government, and not the RBA.


Greg Canavan,
For Markets and Money

Editor’s Note: Newman Show Hijacked! James Woodburn and Kris Sayce hijacked The Newman Show to discuss recent market news across Money Morning and Markets and Money.

Join Woody and Sayce for an informal discussion on…Trump infrastructure spending…where the money’s going…resource investment opportunities…how far the Aussie housing market has left to run…the war on cash… You can watch all that, and more, right here.

Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

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