Robust or vulnerable? Experts are split on Australia’s economic outlook

A customer checks the price of a lime at a fruit stand in Sydney. Australia’s inflation rate rose to 6.1 in June, a 21-year high, according to Statistics Australia.

Lisa Maree Williams | News from Getty Images

This was announced by the Bank of Queensland “fairly optimistic” about Australia’s “very resilient economy” – but not everyone agrees.

“We have a very resilient economy and I think if you look at the global challenges there’s a pretty good chance that we actually come out of it in good shape,” George Frazis, CEO of the Bank of Queensland, told CNBC Wednesday.

“That [Reserve Bank of Australia] has moved fairly quickly to deal with inflation…so I think there’s a good chance we’ll have a soft landing in Australia,” said Frazis.

The RBA hiked interest rates 25 basis points to 2.6% last week, citing the rising cost of living.

As in most countries, inflation in Australia is too high,” said the Australian central bank. “Global factors explain much of this high inflation, but strong domestic demand relative to the economy’s ability to meet that demand also plays a role.”

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Frazis cited “very high household savings” and “very low unemployment” as drivers of the robust economy, despite pressure on house prices.

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“And that’s against the background that real estate prices have actually increased by 39% in the last two years.”

Figures from Corelogic, one of Australia’s leading providers of property data, show that Australian national property values ​​have risen by 28.6% over the past two years. Some capital cities saw price increases of 39% and more.

While the housing sector is very vulnerable to higher interest rates, actual housing construction should remain solid for a while…

Shane Oliver

Chief Economist, AMP Capital

According to Frazis, the linchpin of whether the housing market will be disrupted or not is the unemployment figures, which are at an “all-time low”.

Australia’s unemployment rate was 3.5% in August and the household saving rate fell to 8.7% in the March-June quarter.

“That is our view [unemployment] is likely to continue and that is the main reason for whether or not housing will be disrupted.”

The bank’s CEO also expressed confidence that Australia is “well hedged” against any type of catastrophic event in the housing market, citing homeowners are saving and paying up front.

However, he maintained that a disruption in Australia’s housing market was “unlikely”.

No room for complacency

However, not everyone carries the same optimism as Frazis.

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Australia’s higher interest rates will increase borrowers’ debt repayments, according to an RBA Financial Stability Review.

The report pointed out that income growth in Australia has not kept pace with inflation and households have less capacity to service their debt. In addition, a small proportion of borrowers with high levels of debt and low savings are “vulnerable” to default.

We're fairly bullish on Australia's economy, says Bank of Queensland

“Debt servicing challenges will continue to escalate if economic conditions, particularly unemployment levels, prove worse than expected and house prices fall sharply,” the report continued.

In addition, Deputy Treasurer Stephen Jones warned that Australia’s economy was not “hermetically sealed off” from the projected downturn in the international economy, Sky News reported.

Jones added that the country’s key trading partners are in a “precarious” and deteriorating situation that will impact Australia.

He also noted that when inflation rises, the world economy slows down. This in turn will impact Australia’s growth forecast.

“We just can’t be happy with these numbers,” he said.

The International Monetary Policy Fund recently announced that a third of the world is heading into a recession that could include economic superpowers like China and the US

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Slower growth but no recession

One economist suggested a modest outlook for Australia’s economy, predicting the country’s growth will slow to around 2% rather than slide into recession.

High household debt in Australia could hurt consumer spending, according to Shane Oliver, chief economist at AMP Capital. However, inflation and lower wage growth have also meant that risk is lower, he added.

Australian dollar banknotes of various denominations are arranged for a photograph in Sydney, Australia on Friday August 4, 2017. According to Shane Oliver, chief economist at AMP Capital, Australia’s high levels of household debt could put consumer spending at risk. However, inflation and lower wage growth have also meant that risk is lower, he added.

Brendon Thorne | Bloomberg | Getty Images

“While the housing sector is very vulnerable to higher interest rates, actual housing construction should remain solid for a while thanks to a large pipeline of housing projects that have been approved but are yet to be completed,” Oliver said.

The economist added that Australia’s gas prices have not soared nearly as much as those in Europe and are falling Australian dollar will provide a buffer against global weakness.

— CNBC’s Tan Su Lin contributed to this report.

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