Current Economic Impacts – January 2016

The current global financial market outlook has highlighted some concerning issues that may impact the Australian economy and all sectors of the property industry.

On 16th January 2016 the United States and the European Union lifted sanctions against Iran. These sanctions included banking, steel and shipping, which had been in place since 2012. Access to $70 billion AUD in previously frozen assets and a new ‘freedom’ to do business allows Iran, a major oil producing nation, to renew its crude oil trade industries. In response to the lifted sanctions, the price of crude oil has fallen to a 12-year low of below $28USD a barrel.

As a result of the pessimistic global outlook towards China’s share market and the deceleration in its GDP growth levels, global energy stocks fell by 3% in the week following the lifting of the Iran sanctions. To put this into perspective, 13 of the top 20 companies in the S&P500 are energy based, which explains why the global financial market is experiencing a downturn.

The events of declining energy shares and other falling economic growth indicators have prompted the International Monetary Fund (IMF) to forecast global financial volatility for the near future. Due to the high correlations between financial markets and the globalisation of business, the IMF anticipates that many central banks will not be able to use financial tools to stimulate the economy and soften the imminent global financial market crash. It cites that the European and Japanese central banks are already at 0% interest rates, and that the US Federal Reserve which had recently increased its interest rate to 0.25% may freeze rates again.

In response to the news of international financial instability, many Australian banks and economists are speculating that the Reserve Bank of Australia (RBA) will reduce the interest rate to 1.75% in February 2016. However, the RBA mentioned that a reduction of the interest rate depends on the performance of the Australian economy in the six months to June 2016.

Another issue that may directly affect the Australian property industry is the restriction of foreign money coming from China. The Chinese government has more recently urged banks to limit individuals’ and companies’ foreign exchange transactions under existing regulations, and banned investors from pooling money into foreign accounts. Individuals are already restricted to exchanging an equivalent of $50,000USD in foreign currency per year. Enforcing existing restrictions of Chinese capital outflow to foreign accounts may affect Australia’s Chinese-backed developments and property investments. However, some sources suggest that if China tries to enforce its capital outflow restrictions, then more capital will leave the country illegally.

Current factors that contribute to the welfare of the Australian property industry include, but are not limited to: the attractiveness of the Australian market compared to other markets; institutional investors looking to reweigh their portfolios in the wake of a poorly performing share market; and scarcity of quality stock, particularly in Sydney. With the combination of these factors and a pessimistic global financial market outlook, the high competition for quality assets is likely to continue to compress yields.

The table below provides a snapshot of various economic indicators shown currently, 3 months ago and 12 months ago to give an indication of the movement in the economy over the last year. The data is compiled using publicly available publications which are produced in arrears to the current month and quarter.

Economic Snapshot December 2015

 

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