Features

Australia looks to be heading for quantitative easing

Australia looks like it could be the next big economy to join the quantitative easing (QE) club.

Sydney Harbour ©Alamy

Investors in the "lucky country" will need a lot of luck in 2020

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.

Weighed down by debt

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.

Recommended

Bitcoin mania: private currencies are nothing new
Bitcoin

Bitcoin mania: private currencies are nothing new

The idea is gaining ground that bitcoin and the plethora of other new currencies are here to stay. But the existence of private currencies operating p…
15 Apr 2021
Too embarrassed to ask: what’s the difference between producer price inflation and consumer price inflation?
Too embarrassed to ask

Too embarrassed to ask: what’s the difference between producer price inflation and consumer price inflation?

Two of the most important indicators for the economy are “producer price inflation” and “consumer price inflation”. But what are they and what do they…
13 Apr 2021
How the Covid-19 vaccine crisis is putting the EU in danger
EU Economy

How the Covid-19 vaccine crisis is putting the EU in danger

The botched coronavirus vaccine campaign will cause long-term harm to the EU's economy, says Matthew Lynn.
4 Apr 2021
What does Joe Biden’s $3trn infrastructure plan mean for your money?
US Economy

What does Joe Biden’s $3trn infrastructure plan mean for your money?

Joe Biden is set to announce a further $3trn of public stimulus in the US. Saloni Sardana looks at what’s on the table, and what effect it could have …
30 Mar 2021

Most Popular

“Joke” cryptocurrency dogecoin goes to the moon. What’s going on?
Bitcoin

“Joke” cryptocurrency dogecoin goes to the moon. What’s going on?

Dogecoin – a cryptocurrency created as a joke – has risen by more than 9,000% this year alone. Saloni Sardana looks at how something that began as an …
19 Apr 2021
Lab-grown meat: how “moo’s law” will drive innovation
Soft commodities

Lab-grown meat: how “moo’s law” will drive innovation

Jim Mellon and Anthony Chow, co-founders of Aim-listed Agronomics, explain why they believe that “cellular agriculture” will benefit from massive long…
16 Apr 2021
The bitcoin bubble will burst: here’s how to play it
Bitcoin

The bitcoin bubble will burst: here’s how to play it

The cryptocurrency’s price has soared far beyond its fundamentals, says Matthew Partridge. Here, he looks at how to short bitcoin.
12 Apr 2021