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Should you believe the 'prophets' of doom for 2018 or are good times coming?

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By Peter Switzer

Don’t believe the guess merchants out there who are predicting economic slumps because the housing boom is going off the boil. Sure the house-building sector will slow up and overall house prices in Sydney and Melbourne will either fall or see small rises, depending on the suburbs in question, but Armageddon is not on.

In the home of crazy and negative economic stories that is Fairfax Media, the latest headline is: Mid-year update: “Housing investment rates to fall, raising the prospect of long-term downturn.”

I have to ask: is this misleading on purpose or just a dumb headline by a sub-editor looking for big attention, which he or she is getting from me? They got me in!

Of course, if I could ignore this story, I would, but lots of people read Fairfax newspapers, including me, but their willingness to spread economic doom deserves a bit of attention.

Let’s start with the headline first. While the Government in its Mid-Year Economic and Fiscal Outlook statement says that housing investment would fall by 1.5%, this number has been viewed by some economists as “optimistic”.

The writer links jobs and growth to the housing sector, implying that if housing investment falls by more than expected, then the Government might have an economic downturn on its hands.

If that impression is left behind, let me convince you that this is crap.

Economic forecasting or guessing isn’t easy but the consensus of economists think we can grow faster in 2018 than 2017. We’ve grown at 2.8% this year and the Reserve Bank thinks we will top 3% next year. That’s not a downturn.

When growth beats 3%, unemployment falls and that’s not a downturn.

Right now, the stock market is heading up and this big ‘casino’ generally bets on what it thinks will happen to profits in six months’ time or so, the key market players don’t see a downturn on the horizon.

Chief economist at the broker Morgan’s, Michael Knox (who’s a good tipster) sees the S&P/ASX 200 Index at 6250 next year but it could easily go up to 6700. From where that Index is now that would be an 11% gain. If you throw in dividends of 5%, then a 16% gain doesn’t look like the stock market is betting on an economic downturn.

To be fair to Fairfax, the story did point out that, “In March, the OECD warned of a ‘rout’ in Australian house prices that would lead to a new economic downturn, as both prices and household reached ‘unprecedented highs’.”

That sounds ominous but let me assure I could have made a fortune on betting against OECD predictions! This would only happen if the economy collapsed and unemployment spiked but the opposite is the more likely scenario.

Even the likes of News Corp’s economics commentator, Terry McCrann, who can often be negative, is positive on our economic prospects for next year. And even Fairfax’s own economics guru, Ross Gittins, reckons the strong jobs market now must be a good omen for the economy going forward.

Thankfully, the story was not entirely one-sided. Buried at the bottom of the story was this little chestnut: “Recently published research by the Commonwealth Bank found residential construction had reached its peak but a public infrastructure boom would help offset any economic loss for the sector and its 1.2 million employees.”

Well, that kind of kills the aspect of the story that suggests housing investment falls will KO the economy, doesn't it?

"There is a construction rotation under way in the economy," said Commonwealth Bank economist Kristina Clifton. Thank you Kristina for some balance and real economic analysis.

Right now, in 2017, the economy is getting better and the improved indicators now point to a better 2018, despite the likelihood that housing investment should go off the boil.

The good news is that business investment is expected to surge in 2018 and we’re now in a construction boom, where the demand for engineers is at record highs. There is an infrastructure boom on the way here and around the world, which partly explains why commodity prices are high and tipped to stay high. This from CommSec’s senior economist, Ryan Felsman says it all: “Today’s job market release was the last ‘top shelf’ Australian economic data release for 2017. It certainly didn’t disappoint with 61,600 jobs created – the largest monthly increase in two years. It has been an exceptional year for jobs growth – the second fastest annual increase on record - with around 383,300 jobs created over the past year.”

But wait, let’s end with this one from Ryan: “And all the leading indicators point to further job growth over the next six months.” 

You might not be an economist but who do you want to believe about our economic prospects next year? I don’t need to hear the answer.

 

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Published: Tuesday, December 19, 2017


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