Will Australia be the next big economy to join the quantitative easing (QE) club? Slowing growth has prompted the Reserve Bank of Australia (RBA), the country's central bank, to cut interest rates three times this year to a record low of 0.75%. Yet with few signs of an economic revival, there is growing speculation that next year will bring more drastic measures, says David Taylor for ABC. The RBA can "probably only cut interest rates" by another 0.5% before the policy loses its effectiveness. Analysts are predicting that QE will be rolled out come the second half of next year.
Annualised growth of 1.7% in the third quarter doesn't seem so bad, says Tim Colebatch for Inside Story. Yet that masks the fact that growth is being driven by a fast-rising population. On a GDP-per-head basis Australia is set to be the worst performer amongindustrialised economies next year. Living standards are stagnating.
The debt overhang from an almighty housing bubble is acting as a significant drag on growth. By mid-2015, interest-only loans accounted for 46% of all new mortgages. While house prices have now come back down to earth, household debt levels remain equivalent to 120% of GDP, compared to 87% in the UK and just 53% in Germany.
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All that debt is hampering attempts to stimulate the economy, says Greg Jericho in The Guardian. Canberra has served up some A$4bn (£2.07bn) in tax cuts, yet Jim Stanford of the Australia Institute estimates that "not a single dollar of the tax cut is visible in aggregate consumer spending" for the most recent quarter. Instead of using the extra money to go to the shops, Australians have opted to "pay off bills or put it straight on [the] mortgage". Private sector demand is falling: sales of new cars were down 9.8% year-on-year in November.
During previous slowdowns Australia could rely on massive commodity exports to China to bolster growth. The Middle Kingdom accounts for more than 26% of all the country's exports. Yet with Chinese growth sagging the "lucky country's" 27-year-long recession-free run is facing strong headwinds.
Australian stocks have not been as gloomy as the real economy. The country's S&P/ASX 200 is up by more than 20% so far this year, close to the global average performance. The market's 4.4% dividend yield will also be tempting. On the other hand, lower-for-longer interest rates will lower the profitability of the scandal-ridden financial sector, which makes up a chunky 30% of the ASX 200 index. Bloomberg data predicts that Australian companies will post the worst profit growth in the entire Asia-Pacific region next year. Investors in "the lucky country" will need more luck than ever before.
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Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.
Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.
He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.
Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.
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