Property sector to steer Australia from recession: BIS

BIS says construction activity will lead Australia’s economic growth and reiterates its previous statements that residential and construction property markets will recover late next year.“[The construction industry] is mainly domestically serviced and has a strong multiplier to the rest of the economy,” BIS economist and Economic Outlook bulletin author Rachael Logie said. “Unlike the overseas recession economies, Australia will experience rolling investment cycles, the net effect of which will drive our growth prospects.” According to the forecaster, the RBA’s recent and substantial rate cuts and the federal government’s $10.4 billion injections are enough to safeguard the Australian economy from a recession. “The aggressive reduction in interest rates, now down 3 per cent from early September, and the federal government’s strong fiscal stimulus package are geared to restart the economy,” Logie said.She says rises in household disposable income will eventually outweigh the current savings trend brought on by the fear of recent interest rate rises, inflationary petrol prices, and the subsequent global credit crunch and job losses.“Australia is not in the same dire position as other developed western countries,” she said.“The United States, United Kingdom and parts of Europe and Japan are being caught with over-investment, a collapse in property prices and bank balance sheets, problems of bank insolvency and weakening construction, which will mean periods of declining growth for these regions.” However, Australia’s banking system remains in good shape and will only be marginally impacted by international problems, Logie said.Preventing a slump in the residential property market are the prevailing tight market conditions, and improving affordability due to the interest rate cuts, she said.“Rents continue to rise, and with governments contributing to first home owner deposits, investment in housing is starting to become attractive again,” Logie said.“The pre-conditions of the recovery of consumption expenditure are already in place. “Reduced interest rates and falling petrol prices are pumping disposable income into households, especially across the mortgage belt – the Australian economy will reach a point when the increased income outweighs the fear of job losses.”According to Logie, it is only a matter of time before households begin to spend.However, flailing business confidence and problems obtaining debt and equity financing may negatively impact the next round of projects, with future projects being stalled or placed on hold, Logie says.“The stalling of the next round of projects will start to affect work done on building and minerals investment two to three years from now,” she said.“The issue is the magnitude and duration of the downturn in minerals investment, and the impact on the sectors and regions which service it.“However, this can be offset as non-residential building recovers and infrastructure spending remains strong, provided that state and federal governments hold their nerve.”She says Australia’s current downturn will be short and shallow, and with increasing disposable income resulting from RBA’s rate cuts and government fiscal stimulus packages, the nation’s economy will recover.“Consumer demand will remain flat in the first half of the next year, but recover in the second half, while non-dwelling investment will hold for another year as we finish the current round of projects,” Logie said.“By that time, the recovery in residential construction will be coming through.” Also predicting a recovery late next year is the Australian Industry Group, which posted its Ai Group-Housing Industry Association Performance of Construction Index on Friday.The index slumped a further 4.4 points to 32 in November, remaining well below the key 50-points level separating expansion from contraction for a ninth consecutive month.The drop was 12% on the previous month’s 36.4 PCI level.“Activity in engineering and commercial construction weakened in November, while new orders for the industry as a whole are now at their lowest level in the 38 months since the survey began,” said Ai Group associate director of economics and research Tony Pensabene.Adding to BIS’s short-term slump forecast, HIA chief economist Harley Dale says the HIA’s outlook is a continued decline in economic activity into early 2009.“Sadly, the sustained deterioration in the Australian PCI that is still occurring late in 2008 reinforces our assessment that the short-term prospects for the housing industry are poor,” Dale said.“However, we remain of the view that substantial monetary and fiscal stimulus will deliver a stabilisation followed by recovery in the residential sector as we move through 2009.”

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