Australia’s economy faces challenges including weakening global conditions and difficulties impacting several sectors locally, a leading economist says.

Speaking at the Housing 100 breakfast hosted by Housing Industry Association (HIA) and Colorbond Steel last week in Melbourne, Westpac Chief Economist Bill Evans said the economy was facing difficulties which would force the Reserve Bank of Australia to cut official interest rates from 1.0 percent to 0.75 percent this Tuesday and to further reduce rates to 0.5 percent early next year.

Already, the economy is under strain.

On a seasonally adjusted basis, ABS data indicates that the real value of gross domestic product (GDP) increased by just 1.4 percent over the year to June. With the population having risen by 1.6 percent, this means GDP per capita actually contracted over that time.

Going forward, Evans talks of one positive in improving housing market conditions in Sydney and Melbourne. – albeit as noted below with there being some time before this will translate into a new upturn in building.

According to Evans, evidence of renewed strength in the market for established homes can be seen in data relating to auction clearance rates and turnover along with growing confidence surrounding house price projections. On the first two matters, recent data from CoreLogic showed that over the past year, auction clearance rates across capital cities have risen from 52.8 percent to 74 percent whilst the number of homes taken to auction across capital cities has risen by just over 400 compared with the same time last year to come in at almost 2,000 per week. On housing market confidence, Evans says Westpac’s own survey of consumer sentiment has shown that confidence in house price prospects has picked up from as low as 80 on its index several months ago to around 130 now.

Because of this, house prices in Sydney and Melbourne are up three percent from their trough in May. Going forward, Evans expects Sydney house prices to grow by a further three percent during the remainder of the year and by six percent next year.

All this, he says, is being driven by renewed availability of housing finance.

Throughout the second half of last year, Evans says credit availability for housing fell by 15 percent amid tighter controls imposed by the Australian Prudential Regulatory Authority the fallout from the Banking Royal Commission.

Now, the Commission has passed and banks have reopened their chequebooks. Across June and July alone, the dollar value of approvals for housing finance increase by eight percent.

This lift in housing market conditions will deliver an important boost to the struggling retail sector and – down the track – to new home construction.

Another positive is the improving fiscal position of the Commonwealth Government, which according to Treasurer Josh Frydenberg is expected to be in surplus in 2019/20.

This, Evans says, will enable the Government to support the economy should there be any form of external shock.

That said, Evans does not anticipate much immediate help from the Government outside of some initiatives in repairs and maintenance – a stimulus measure which has immediate impact and for which no environmental approvals are needed. More substantial stimulus in the form of personal allowances or accelerated depreciation may be possible in next year’s budget.

That, however, is where the good news ends.

According to Evans, the economy faces challenges across multiple areas.

First, economies in both the United States and China are slowing. In America, the latest Commerce Department data indicates that growth in GDP slowed to an annualised rate of 2.0 percent in the second quarter. In China, economic growth has slowed from an annualised rate of 6.8 percent in the June quarter of 2017 to 6.2 percent in the June quarter this year.

Whilst he does not foresee a US recession, Evans does expect the US economy to slow further.

More important, Evans says, are challenges in the domestic economy.

The biggest of these is wages. Whereas many Australians have in the past have adopted spending habits on the basis of their pay rising by around four percent per annum, they now have to adjust their expectations and spending barometer to factor in wages growth which is likely to remain at only two percent or thereabouts for some time.

According to Evans, this is being driven by a combination of perceived threats to employment from artificial intelligence, overcapacity in the world economy (China consumes only around half of what it produces), a wage level which is already elevated by international norms and spare capacity within the Australian labour market.

On that last point, Evans notes that unemployment has increased from 5.0 percent to 5.3 percent over the past two months alone. Near term, he expects the jobless rate to rise further before peaking at 5.5 percent.

Partially because of subdued wages, retail conditions are soft. Over the year to July, retail sales in Australia grew by just 2.3 percent – an amount which implies very little growth in volume once inflation of 1.6 percent (year to June) is taken out. In the month of July, seasonally adjusted retail sales actually fell by 0.1 percent.

Some subsectors within retail are facing particular challenges. As housing market conditions fell over the past two years, the dollar value sales of household goods in July was barely above levels seen two years earlier and has fallen over the past two years in inflation-adjusted terms.  

Even harder hit is the motor vehicle industry, which Evans says faces structural challenges as young Australians are less wedded to the idea of car ownership compared with their parents. Using data compiled by several sources, he estimates that the number of car registrations in June was down from its level from one year ago to the tune of almost ten percent.

The aforementioned decline in household goods points to the next big drag on the economy in home building. Approval data is not encouraging. On a seasonally adjusted basis, the overall number of new dwellings approved for construction over the three months to July stood at 41,714 – down 24.1 percent compared with the sky-high levels of 54,669 during the same period in 2018.

Going forward, Evans sees further falls in approvals for the next couple of years. As a result, he says the pipeline of work in residential construction will not bottom out until 2021 in New South Wales and until later than that in Victoria.  

This provides a further headwind which the economy does not need at this time Evans says.

Finally, Evans says the stimulus associated with record infrastructure investment may begin to fade.

In recent years, the boost provided to the economy by this sector has been massive. Using data from a combination of sources including Deloitte Access Economics and Westpac Economics, Evans estimated that the pipeline of projects in public transport which are either definite or under consideration has surged from 171 in the final quarter of 2015 to 317 in the first quarter of 2019.

Whilst activity levels in this sector will remain elevated, however, Evans says further growth or increase in activity will now begin to wane.

All this, Evans concludes, points to significant challenges – an observation he says will lead to subdued economic conditions and a weaker dollar.

“The weak consumer is going to continue to weigh on that part of the economy,” Evans said.

“Weak wages are not going away so the weak consumer is going to be with us for some time. The retail sector is now I would think in recession and facing large structural challenges. The dwelling construction contraction is going to continue into 2019, 2020 and 2021. The oversupply of high rise in Melbourne and Sydney is going and we will see a two-tier pricing model The labour market is showing excess capacity. The unemployment rate is rising and the global outlook is weak and threatening – the US is slowing China is slowing.

“That spells a weak Australian dollar.”