Aussie Economy: Stronger Than You Think

Aussie Economy: Stronger Than You Think

Hot, hot, hot.

That’s the only way to describe the Northern Hemisphere right now.

Air conditioners are firing all over Europe, China and Japan. They’re blowing cool air out — and the price of thermal coal up.

Thermal coal prices are now at a six-year high.

This will keep boosting Australia’s trade numbers, which already looked good.

The Australian Financial Review reports that the latest figures from June blew past the previous estimates.

What’s more, we’re still running a trade surplus. In fact, it was the largest surplus since May 2017.

Yet while thermal coal played a big part in boosting trade, the star was LNG. Exports of natural gas were up 14%.

Theoretically, the strength in these two natural resource sectors should support the Aussie dollar and even push it strongly higher.

However, this development is interesting in the context of Australian real estate too.

The mainstream press is rolling out the usual doom scenarios because property prices are currently weak in Melbourne and Sydney.

However, both of those markets are up over 70% since 2008. Nothing goes up forever. It’s fair to say a pause is due.

The areas to watch now are Queensland and Western Australia to see if this commodity price strength shows up in property prices in these states. They have a lot of room for growth compared to NSW and Victoria.

For example, Rio Tinto chief executive Jean-Sébastien Jacques says inflationary pressure is eating into Rio’s earnings. Part of that involves high demand for mine workers with so many projects happening in Western Australia right now.

That sounds like the kind of kick the Perth market needs on the property front.

I’m not saying the mining states are going to take off like a rocket tomorrow, but I find the general doom scenario unlikely.

It’s not as if credit growth is going to die off completely. ANZ, for example, is following the lead of CBA by cutting variable loan rates.

And, as I’ve pointed out before, there are a lot of non-bank sources of money available. The data on these figures isn’t easily captured either.

Can we find clues elsewhere?

The property doomsters are forever saying the average consumer is scratching around for their last dollar to pay the mortgage, perhaps with a bit left over for cat food.

But the consumer discretionary sector on the ASX doesn’t look too bad if we bring up a chart. See for yourself:

Source: Optuma

At least we’re now into August. The earnings season will reveal just how well the economy is travelling. My take is the surprise will be to the upside.

Having said that, I prefer to steer readers in my small-cap Aussie newsletter toward the strength in the US economy right now.

The US is dragging the rest of the world along with it for now. It’s quite possible US GDP growth hits 4–5% over 2018 and 2019. By comparison, the average over the last nine years or so is 2%.

The strength around US housing could continue to drive consumer spending there easily.

I cited a report this week in my newsletter that shows Americans have an astonishing $5 trillion in housing equity wealth that they can tap into if they so desire.

And as home sales keep rising, there’s the additional spending on services and furnishings that comes with that.

I’ll also keep an eye on the US banks to see if the recently rising yield curve spurs them on to make more loans. That would be more bullish for the US than anything else.

However, it’s also worth keeping an eye on Europe for upcoming strength.

While Donald Trump steals the headlines with his constant tariff battering ram, a little-noticed story last month was the free trade agreement announced between the European Union and Japan.

These economies produce a third of global GDP between them.

So it’s not all bad news out there on the trade front.

In fact, I don’t worry about any of the stuff you usually see bandied about in the mainstream press.

Instead, I worry about the pressures building in the oil market.

You wouldn’t know it considering crude oil just came off a six-week low. But that’s not necessarily unusual in the context of an overall bull market.

After all, markets never go up in a straight line.

More next week.


Callum Newman Signature

Callum Newman,
Editor, The Daily Reckoning Australia