US & Europe Debt: How Will This Affect Australia &
By Ed Chan
With a global economy showing little sign of recovery in 2012, Ed Chan looks at some of the issues holding back the major developed economies and what this means for Australia and its property sector.
As you would all be aware, the US and parts of Europe are in significant economic disorder right now. The US Government’s debt of $14 trillion to US GDP of $14 trillion represents a debt GDP ratio of 100% and the International Monetary Fund (IMF) predicts this to rise to anywhere between 129% to 157% of GDP by 2020.
However, the US are nothing compared to the current euro-zone crisis which reached critical when Italy joined the ‘seven per cent’ club, the group of euro-zone countries whose borrowing costs (as measured by ten-year bond yields) have gone above 7% and stayed there. Its public debts are close to 120% of GDP. Only Greece has a greater burden.
There are a number of factors which are contributing to the developed world’s free fall.
For the US this includes two failed stimulus packages, growing unemployment (which is likely to increase beyond 10% in 2012), an ageing population who are no longer spending and, a flagging real estate market.
Italy,Greece and Spain have suffered thanks to the strong Euro which has only benefited stronger countries such as Germany and France, both of whom now bear the responsibility of bailing out their neighbours.
All of this makes the 10 year global outlook appear bleak and we must consider the potential impact on Australia.
Will we continue to enjoy the good times or do we also face a bust? I would argue on the contrary.
Australia’s ability to have weathered the GFC storm in 2008 was no fluke. With a robust banking system that has in place strict borrowing conditions, Australian banks fared much better than their US and European counterparts.
Consider also that, three years ago when it first became apparent that the world faced a GFC of unknown proportion, Australia was in the fortunate position of having no debt and a surplus cash reserve of some $20 billion. The economy was and is still in an extremely healthy condition. Our current debt level has risen to around $50 billion but is still relatively low when compared to our GDP (for detailed analysis visit the Reserve Bank’s web site at www.rba.gov.au).
Australia continues to enjoy the buffer of a booming resources sector, an economy that is still growing and unemployment rates set to remain below 5%. Large Australian blue chip companies continue to deliver healthy profits and overall market sentiment in Australia appears to be wary but positive.
The collective result: the Australian economic climate is healthier than we give it credit for and what’s more it will remain so. Here is a list of reasons to support my optimism.
- Australian banks are strongly regulated and have good lending practices. With huge reserves, a sensible interest rate and improving consumer demand we are likely to see lending levels increase in coming months.
- Interest rates currently at 7% allow the Reserve Bank a lot of room to move, especially if a further interest rate drop is required to help stimulate the economy.
- The Reserve Bank actually forecasts modest economic growth between 2% to 3% per annum for the foreseeable future, which should help keep unemployment at around the 5% mark. (This figure is considered by the RBA to be ‘full employment‘).
- Whilst national real estate prices are high in Australia when compared to other countries, 70% of property owners are owner occupiers and experience shows that most would go to extraordinary lengths to stay in their homes.
- By 2014 there will be a national under supply of 308,000 dwellings. Whilst this is not great news for people looking to buy, strong demand will continue to support and grow the Australian property market.
- The Australian resources boom, which is being driven by extraordinary urbanisation rates in both China and India, will continue to roll on and support the nation’s coffers. Agriculture will also enjoy increasing global demand.
- Whilst the current minority Government has ‘wobbled’ in recent months over issues such as the Carbon Tax proving immensely unpopular, new issues that will be addressed in 2012 (potentially by a new majority Government) include improving the nation’s export competitiveness and halting the decline of the manufacturing sector. Any successful progress here, can only benefit Australia’s competitiveness.
- Most Australian blue chip CEO’s are cautiously optimistic about their future performance (except in retail).
- Whilst Australia also faces the challenges of an ageing population, many baby boomers have downsized as they enter retirement and the estimated 3.8 million of the Gen X and Gen Y population, swelled by annual immigration of 350,000, will help sustain demand for housing, products and services.
- Australian property prices should maintain a “steady as she goes” direction over the short term and will start to grow again once people’s confidence improves as they realise that Australia will not experience the same problems experienced in the US and Europe.
To recap, as bleak as the US and Europe situation appears right now, life does and will go on as it has done in Japan for many years of no growth now. What’s more, many people have created enormous wealth in periods such as these. Enormous profits await for the opportunistic minority who maintain a realistic and positive perspective of the future.
Australia remains the ‘lucky country’ and there is truth in the old adage that every cloud has a silver lining.
Non-Executive Chairman, Chan & Naylor
(The views expressed above are the personal views of the author).
 The maths behind the madness – Economist Magazine, 9th November 2011
 Europe’s deepening crisis – Economist Magazine, 10th November 2011
 Aust shares gain 1% on positive sentiment – The Age, 9th November
 Statement on Monetary Policy – RBA, August 2011
 National Housing Supply Council – Australian Government, April 2010
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