In an Oliver’s Insights update released on 22 November, AMP Capital chief economist Shane Oliver took issue with a recent article by Matt Barrie with Craig Tindale called “Australia’s economy is built on shaky foundations, and it’s about to collapse”.
The article in question argues that growth in the Australian economy has been built on property and mining bubbles driven by the Chinese economy. It suggests that Australia has relied on China for too long and our economy is about to collapse.
Addressing the article, Mr Oliver said that “crash calls” have been made for as long as he has been an economist and are like “a broken record”. While Australia is now more vulnerable to the Chinese economy than it has been in the past, he argues that the Australian economy is actually more diversified than many believe.
“If Australia is so dependent on the commodity price boom and mining investment boom, why didn’t it crash when they crashed after 2011 and 2012–13, respectively? The simple answer is that the Australian economy is actually less dependent on mining, and hence China, than many commentators claim.
“In reality, mining activity is only 7 per cent of Australian economic activity (or GDP) and agriculture is 3 per cent, which taken together hardly suggests an excessive reliance on exports and China.”
A slowdown in housing construction is causing many commentators to “wheel out the disaster scenarios”, but Mr Oliver said that the contribution of residential housing construction to economic growth is largely exaggerated. Last year, it contributed around 0.3 per cent directly to growth, and indirect effects are likely to have taken that contribution to around 0.6 per cent.
While there is a risk of a house price collapse, Mr Oliver believes that it is more complicated than people think.
“The housing boom in Sydney and Melbourne has not been built on the China boom — in fact, it has had more to do with strong population growth and the end of the mining boom,” the chief economist said.
He continues to forecast that prices in Sydney and Melbourne will fall by 5 per cent to 10 per cent, stressing that a crash is unlikely unless unemployment rises, the RBA hikes rate aggressively or the supply of units continues for several years.
RBA governor Philip Lowe confirmed this week that the next move in interest rates will be up rather than down.
While the RBA expects inflation to remain subdued for “some time yet”, headline inflation is forecast to eventually move above 2 per cent on a sustained basis, the governor said.
“We still, though, remain short of full employment, and inflation is expected to pick up only gradually and remain below average for some time yet,” Mr Lowe said.
“This means that a continuation of accommodative monetary policy is appropriate. If the economy continues to improve as expected, it is more likely that the next move in interest rates will be up, rather than down.”