The Big Picture – May Economic and Property trends you must understand with Pete Wargent

It’s that time of the month – when I have my regular Big Picture podcast where Pete Wargent and we look at the macroeconomic factors affecting our economy and our property markets

This time last year, we were supposed to have a federal budget. Instead, we had a pandemic.

And over the last year many elements of our life were upended due to Covid 19

Around this time last year, our Prime Minister Scott Morrison said he’d build a bridge for us to get to the other side and it seems he did.

The government threw everything it could, including billions of dollars at creating jobs and keeping our economy moving and it succeeded.

And it’s still doing so if you look at the federal budget handed down by Treasurer Josh Frydenberg - you’d think it was still raining money.

Never before has a budget done so much to supercharge the economy after the worst of a recession has passed.

But don’t worry, this podcast isn’t another rehash of the budget, even though there are a few interesting points I want to discuss with Pete – things that haven’t been clearly explained but I think we need to understand as investors.

Plus we also will look at the macroeconomic factors affecting our economy and the property markets  to help give you some more clarity  about what the future holds so you can make better investment and  business decisions

Understanding the Big Picture

Our property markets don’t operate in isolation, so I believe it’s good to regularly have a look at the big picture, the macroeconomic factors affecting not just Australia’s economy, but the world economy, and who better to discuss that with than Pete Wargent, a lifelong student of and commentator on our economy.

Since last month there’s been lots of good economic news and Josh Frydenberg delivered this year’s budget.

The underlying message from this pandemic budget is that while our recovery is running apace, the economy still remains fragile and unable to stand on its own two feet.

The government has no option but to continue spending, and it has given the green light to a number of initiatives to ensure our economic recovery continues.

With all the tax dollars rolling in, what kind of treasurer could resist spending some of that, given ultra-cheap borrowing costs and an election campaign expected within a year or so?

Booming iron ore exports have delivered a bumper company tax take over the March quarter, with the budget’s bottom line improving by $30bn since the mid-year economic and fiscal outlook in December.

And our economic recovery is likely to continue, underpinned by strong household spending supported by further lifting of activity restrictions, increased confidence, and the world effects from higher housing prices.

Rapid fall in unemployment could challenge RBA stance

There are now forecasts that expect the unemployment rate to fall to 4.8% by end-2021 and 4.4% by end-2022. And even lower again in 2023 seems likely.

These forecasts potentially challenge the RBA’s expectation a rate hike is “unlikely to be until 2024 at the earliest”.

• While these forecasts may appear ambitious, they reflect the expectation of a decelerating pace of labour market improvement, particularly in 2022.
• Ultimately, it will be inflation that matters for the RBA, and the most important judgment in our view is the strength of the transition from underutilization to wages, and then to inflation. The RBA is presuming this transition will be very slow, as it was the last cycle, but the risk around this assessment appears rather one-sided.

Sluggish inflation numbers push rate hikes further down the road

The CPI rose by 0.6% in the March quarter, taking annual inflation to 1.1% year-on-year.

Although this is the third increase in a row, we’re still well below the target band and underperformed expectations by 0.3% in March.

With a few exceptions, such as jewellery, petrol, and vehicle prices (driven by supply bottlenecks), price pressures remained weak across most of the economy, especially in food and housing.

To some of us who remember the Consumer Price Index (CPI) rising above 10% for much of the late 70s and early 80s, the RBA’s present determination to drive up inflation might seem a little counterintuitive.

Investors are back in the market

We know that home loan approvals have been surging, particularly for first home buyers and that investors have taken to the sidelines, but that’s changed recently as more investors are now back in the market as evidenced by increasing investor loan approvals.

Building approvals surge to the second-highest in history

Residential building approvals rose 17.4% m/m in March, surprising sharply to the upside and taking the level of approvals to the second-highest in history.

Going forward, we will be looking to see whether the recent strength in detached dwelling approvals will be sustained given the end of the Federal Government’s HomeBuilder program (March was the last month to be eligible for the grant).

Since HomeBuilder was introduced in June 2020, detached house approvals have soared by 72% and are driving cost pressures through the industry.

Should we be worried about geopolitical risks?

• The political pendulum is swinging back to the left -
• geopolitical risks are higher than prior to the GFC reflecting three big themes: a populist backlash against economic rationalist policies; the falling relative power of the US; and the polarising impact of social media.
• key geopolitical issues to watch this year are US and Australian tensions with China; Iran/Israel tensions; Russia and Ukraine; the German election; US tax hikes and a possible early Australian election.

Resources:

Metropole’s Strategic Property Plan – to help both beginning and experienced investors

Gets your bundle of eBooks and reports here: www.PodcastBonus.com.au

Pete Wargent  Next Level Wealth 

Pete Wargent’s new book Low Rates High Returns

Shownotes plus more here: The Big Picture – May Economic and Property trends you must understand with Pete Wargent

Some of our favourite quotes from the show:

“I recently read that the suggestion was that a huge number of Baby Boomers were going to downsize because of this. I can’t see that happening.” – Michael Yardney

“When people from outside Australia look at us, Melbourne is the only city of five million people that’s actually beaten COVID, and life’s moved on again.” – Michael Yardney

“If you want to be successful, you need a mentor who’s going to help guide you through life.” – Michael Yardney

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