The Forces that Influence the Australian Economy

As keen investors, being aware of factors that move the Australian economy is paramount to success. At the end of the day, the strength or weakness of our economy has a massive effect on our investments.

There are some merits Australia can hang its hat on. Australia is one of the largest mixed market economies in the world. And in 2017, it was the second wealthiest nation in terms of wealth per adult — Switzerland were the only ones who beat us to that throne.

Of course, the Aussie economy’s greatest achievement is its 27-year recession-free streak through the turn of the century. It is down in the history books as an economic world record.

But there are definitely some grey areas.

What Forces Influence the Aussie Economy?

Global markets are so intertwined these days, what happens in one economy can have a huge impact halfway around the world.

Though it has its role in the global market, Australia is small compared to the other world competitors like the US or many European economies. Because of this, any shift in the stability of the world markets is felt by the Aussie economy, which is quite sensitive to residual movements.

Some economic forces that are bound to have an effect on the Australian economy include:

china mining

China’s Slowdown for Mining Resources

The Australian economy was a major beneficiary of China’s decades-long economic transformation.

Chinese demand for resources led to a mining boom that peaked in mid-2012.

This effective arrangement (with Australia as one of China’s key commodity suppliers) is no secret. As a rapidly developing economy, China’s intense demand for resources such as iron ore and coking coal — to be used in steel production — has been music to the Aussie mining industry’s ears.

Australia is abundant in these resources and is in fact the leading iron ore producer in the world. It doesn’t take a genius, then, to understand that this market sector is one of the largest contributing factors to the Aussie economy.

It’s the ideal cross-country relationship…when it’s working well. High demand satisfied with high supply means two happy and stable economies. But what about when demand drops?

China’s growth as a consumer-led economy has ground to a halt because it has resulted in too great a debt level for the country. What’s more, the severe amount of pollution from excessive steel production has grown to such a major concern that severe cuts in this sector are being enforced.

China is hell-bent on resolving these weaknesses. While their actions may not directly affect the mining of resources, they will reduce China’s demand for them. This means bad news for the major resource suppliers…like Australia.

But China isn’t our only international influence…

US economy

The US Ripple Effect

The 2008 Global Financial Crisis was torture for the United States. Their entire economy was brought down to terrifying lows, and it looked as though there would be no resurgence.

Nonetheless, we’re here. It’s taken them a while to recover, but the US have still managed to remain in front of the global economy.

But as we’ve just made apparent with China, nothing lasts forever in markets.

And neither do the US terms of presidency. With each new face that takes their honoured place in the White House comes new investment strategies, new tax schemes, new resources worth persevering, new ideas on how to keep their economy afloat.

The gap between US President Donald Trump’s lavish infrastructure spending promises and reality has no doubt created rocky ground in the US and global economy. And the hefty tariffs placed on goods under his administration have understandably led to heightened trade tension across the globe.

Moreover, these tariffs may increase inflation, leading American consumers into more debt — a key sign of economic failure. In short, the nation is at risk of over-heating.

And if it does overboil, the global effects could be catastrophic.

Think of it as a volcano. As the largest economy in the world in terms of GDP, the US is that protruding rupture in the Earth’s crust, towering over the flat ground. But all this inner political stress is causing it to boil, threatening an eruption.

If and when this happens, the world — including the Aussie economy — will need to navigate their way out of the molten economic mess. The problem is, we aren’t quite sure how to do that.

And a little closer to home…

Australian property market getting tough, buy your own house, housing bubble, australian economy

Our Local Property Bubble

Since the 1990s — when property prices began increasing quicker than inflation — Australia has seen housing prices steadily soar.

In the late 2000s, property markets all over the world were crashing left, right and centre. The GFC began in the US sub-prime housing market, and stomped over houses across the globe. And yet Australia’s housing market continued to rise.

Unfortunately, however, Aussie wages didn’t follow the same trajectory.

In late 2016, Australian households became the most over-indebted in the world. Sydney and Melbourne — our two most populous and expensive cities — were home to the greatest amount of over-indebted households. There was a total of over 800,000 over-indebted homes across the two cities.

These capital cities fast become some of the most expensive property markets in the world. And yet somehow, we’ve still been able to grow…

See, despite this property price climb, Australia has slipped down the global cost of living ladder. This makes us look quite appealing to international investors. These hungry international buyers want a piece of Aussie land that can be subdivided or leased as a form of investment. In turn, this can mean big boosts for the Aussie economy.

Of course, this can all flip right around, if and when this property bubble bursts open. Once the Aussie property market no longer looks appetising, global investors will back off.

2018 has seen some of the first hints of exactly this risk, with house prices in Sydney and Melbourne finally faltering for the first time in years. Indeed, we had a six-year first with Melbourne’s shocking overtake of Sydney as Australia’s worst performing housing market.

This also marked the fastest nation-wide drop in housing price since 2012.

These falling housing prices seem to go hand in hand with strict lending conditions placed on first-home buyers in Australia. And with the Royal Commission creating anguish amongst the big four banks, it’s hard to see this changing in the near future.

Highs and Lows

Thankfully, Australia is aware of their small status on the global economic stage, and have set up ideal trading arrangements to protect its economy.

But this means that if such arrangements start to deteriorate, there isn’t much of a backbone to keep the Aussie economy upright.

The economic volatility means change is probable — indeed, inevitable.

Markets & Money