Goldilocks global economy supports Australia in 2018

Plentiful capital, a Goldilocks economy, and balanced supply-demand fundamentals usher in 2018. But capital market volatility, geopolitical tensions and economic risks could disrupt these “just right” macroeconomic conditions, finds LaSalle Investment Management.

With a 26-year streak of growth under its belt, Australia’s economy looks healthy on the back of a recovery in China and the “generally positive” global environment, LaSalle’s investment strategy annual report finds.

Elysia Tse, LaSalle’s head of Asia Pacific research, says investment in infrastructure, coupled with continued growth in the Asia Pacific, will “likely extend” Australia’s “growth story” in the near term.

This domestic growth environment is expected to bolster real estate occupier market fundamentals.

Despite the positive economic outlook, key risks to Australia’s outlook remain the imbalanced economic structure, the health of the domestic housing market and banking sector liquidity. The high underemployment rate and household debt also weigh down consumer spending.

“The country’s banking sector’s reliance on wholesale debt, making up one-third of bank funding and mostly raised overseas, could push up borrowing costs further, acutely affecting the real estate sector, as central banks tighten monetary policies,” Tse says.

“Property yields in Australia are susceptible to upward pressure and pricing risk is tilted to the downside.

“Additionally, the country’s housing sector, one of the most risk-exposed in Asia Pacific, is primarily driven by high housing prices. A liquidity crunch or pockets of weakness, though unlikely in the near-term, could create an attractive risk-return profile for the country and offer more attractive investment opportunities in Australia than the current market environment.”

From a long-term perspective, Australia’s economic outlook remains positive, underpinned by the strongest population growth among major developed economies in the world.

Australia remains a destination for global capital, “barring no sharp increases in the interest rate environment globally,” Tse adds.

LaSalle’s report reinforces the findings of the March ANZ/Property Council Survey, which shows that firms in the property sector remain upbeat about the economy.

Daniel Gradwell, ANZ’s senior economist, says the elevated business conditions are being supported by solid profit growth.

“Company profits are 20 per cent higher than a year ago, and this is supporting a promising recovery in non-mining business investment.

“A solid improvement in CAPEX expectations as well as ongoing strength in non-residential building approvals suggest that there is a substantial pipeline of private investment ahead.”

Public sector investment is also providing a “solid lift to demand”, Gradwell says, pointing to the record pipeline of infrastructure spending.

While cooling house prices may remove one of the supports to consumer spending, the risks to Australia’s growth outlook are “relatively balanced,” Gradwell adds.

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