Dollar, housing key factors
The path the Australian economy takes in 2014 will be lit by two prices.
One is the Australian dollar, the other is house values.
If neither heads in the right direction, 2014 could turn out to be more disappointing than 2013.
That was a year of below- normal employment growth and rising unemployment. But that’s what typically follows below- normal growth in economic output, which in turn typically follows a peak in export commodity prices.
And commodity prices mid- 2011.
In fact, the economy has been lucky to escape the recession, which, so far, has been inevitable in the year or two following the end of major commodity price surges in the post- World War II era.
But it’s not too late for things to go utterly pear- shaped.
The Aussie dollar and the housing market could combine to make sure the historical pattern is repeated. Here’s how.
The economy, which is already growing at about two- thirds its normal pace and staring down the bar-
peaked
in rel of slower growth as the mining investment boom winds down, needs two things to help it kick the mining investment habit. One is a lower exchange rate. That would give exporters relief from intense competitive pressures. And it would give domestically focused industry a bigger slice of the spending done by Australians.
The other is for the housing ket to stay strong.
It is a key economic signal, encouraging investment by reducing fears that profits will be undermined by capital losses.
The high- employment building industry is enmeshed with many other sectors and has major spillover effects throughout the economy.
And housing assets are central both to household finances and the strength – and therefore the capacity to lend – of the banks.
The Reserve Bank of Australia has made it clear it wants prices to remain strong. But what if the Aussie dollar and the housing market don’t follow the script?
It’s easy to imagine another bout of strength in the exchange rate, per-
mar- haps if expected interest rate rises in the United States are delayed, or if Europe’s economic recovery falters and stokes more of the demand for Australian bonds that has buoyed the aussie in the past year or two.
And it’s easy to imagine a dip in housing prices, prompted by investor fatigue, sluggish jobs and wages growth and ongoing pressure from a strong Aussie dollar.
Speculation about an eventual rate rise from the Reserve Bank will not help. The notorious fickleness of investors currently dominating the market could turn a price retreat into a rout if they turn tail en masse.
A price slump would undercut consumer spending and curtail bank lending, not just to households but to businesses as well.
Add a too- high exchange rate and a slumping housing market to the withering mining investment boom and you have a recipe for recession.
Of course, it’s not normal for just about every important thing to go wrong at once.
But it does happen.