What a clapped-out Holden says about the Aussie economy

What a clapped-out Holden says about the Aussie economy

I am currently writing to you from the wobbly chair inside my mechanics office.

The reason why I’m so uncomfortable is because I’m not in the service centre of a major car dealership.

There’s no coffee machine, free Wi-Fi, or couch for me to wait on. Just an office that smells like petrol.

Even though my car is well inside the new car warranty period, I only go to this mechanic.

The same one I’ve visited for ten years.

For one simple reason; I trust him. When you regularly find your car driving down bush tracks, history has taught me you need a trustworthy mechanic on your side.

When I pulled up this morning, a car was coming off the bed of a tow truck. Turns out, it was the third tow truck drop-off for the morning.

Then, my mechanic, Travy, told me that’s on top of the four tow trucks that pulled up yesterday.

Telling me, ‘This year, you know, it’s been one of those years where people are spending money fixing the car up, rather than just trading it in and getting another one. All year, I’ve been bringing cars back to life, rather than just changing the oil.’

And that’s exactly the moment the alarm bells sounded in my head…

The RBA wants growth

Now, yesterday, I said we’d be discussing how most Aussie jobs are reliant on just a few sectors in the economy.

And I will get to that tomorrow.

The problem is, the sectors in the Aussie economy are so interlinked, you can’t talk about the impact in one sector…without looking at how it will affect another one.

More so, it’s important to understand how all the sectors work together. Especially when all the official data the mainstream produces tells you the Aussie economy is healthy.

Recent gross domestic product says the Aussie economy is chugging along, and shows a strong ‘growth’ rate of 3.4%.

Does that make the Aussie economy healthy?

By central banking standards, perhaps.

To them, a healthy economy is one that is ‘expanding’. In other words, one where Australia’s economy continues to grow each year.

But our consumption-based economy means our ‘growth’ must come from constantly buying things.

The Reserve Bank of Australia (RBA) like to see discretionary spending increasing every year. That includes items like holidays, apparel, electronics, dining out, and so forth.

Same goes with housing finance and new car sales data.

If these two segments are increasing each quarter, it adds to the case that our economy is growing.

And while recent GDP data says the economy is working just fine, the individual sectors are starting to unravel.

Like the increasing rate of broken down cars passing through my mechanics workshop.

The fact that more cars are being fixed up than traded in says that Australia has a bumpy ride ahead.

Doing up the junker

House prices have been falling since mid last year. That’s nothing new.

And it turns out the trend my mechanic was describing is actually a symptom of falling house prices.

For the past seven years, Aussies have bought around 1.1 million new cars each year, with a small increase in sales annually. This told the market new car sales were strong, indicating a ‘healthy’ economy.

Of course, that all began to change towards the end of last year.

As house prices fell, so did housing finance and, with it, new car sales.

New car sales follow housing prices

Source: CoreLogic RPData; VFACTS; Macquarie Macro Strategy; Business Insider Australia

Turns out, there is a correlation between house prices and new cars sales.

For sure, it’s a not a lockstep move. And those high car sales can be attributed to end of financial year deals in June. Yet, it’s the overall trend that’s important.

Just because we are buying less new cars, does that mean we are buying more second-hand ones?

Not so, says Australia’s Federal Chamber of Automotive Industries. In the 12 months to September this year, new car sales fell by 5.5%.

However, the biggest declines came from the second-hand market. Over that same period, private sales dropped by 15.8%.

People are starting to spend less, and that is a worrying trend.

Don’t believe the statistics

This data backs up the year-long observations from my mechanic.

People are fixing cars rather than buying new ones.

Put simply, when house prices rise, people buy more cars.

When houses prices fall, new AND used car sales fall.

Economists like to call this the ‘wealth’ effect.

That is, when you feel rich, you’re more likely to spend your money. But if you’re feeling short of a buck, you tighten the purse strings.

And falling car sales is just the beginning.

Don’t let the statistics lull you into a false sense of security. Rosy economic growth hides the growing problem for ordinary Australians.

Tomorrow, I’ll show you how lower house price could see more than 10% of the Aussie workforce without a job.

Kind regards,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia