Property Club Conference – Australian Economic Outlook – Part 7.

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Property Club is no. 1 wealth creator in Australia and New Zealand. They focus on helping their members with property investment. Video is from their 20th annual property club conference where Mark Bouris was presenting about Australian Economy.

[transcript from video above]

Let’s look at the various parts because there’s four parts to it to the sum, five components, but four parts. Household consumption. They’re the items that make up how they measure household consumption. They add all those together. They’re pretty normal sort of things, nothing outrageous you wouldn’t expect. Has food, what is the productivity, what is the amount of money that’s being spent on food. Alcoholic beverages, tobacco, sorts of things all of us enjoy every single day of the week, the sorts of things we need to run our homes and our households.

That household consumption number is effected by a number of things. What drives household consumption is wages, wage rises. If you see something that’s in the Fin Review that says that wage rises have been flat, or wages are flat and aren’t increasing, that affects the amount of money that gets spent in here. If wages aren’t going up, that affects that number.

Now, this number, household consumption, accounts for 60% of the GDP number, so it’s the biggest component, the most influential component, 60%. Wages affect that. Confidence affects that. When the National Bank puts out a survey on confidence and the various confidence numbers come out, those things are important because it affects this. If you keep getting no confidence, no wage rises, high unemployment, that number won’t change.

It could go backwards. If that number goes backwards, and it accounts for 60% of GDP, it’s going to be a bit of a struggle to get GDP growth at three and a half percent. Which means, the Reserve Bank will keep interest rates where they are. You following this? You getting the trend? Okay.

Business investment. Now, generally speaking economists break business investment up into two parts, mining and non-mining. The main reason that’s a new phenomenon, but it’s sort of been more of a phenomenon in the last, since the GFC period, because mining investment was probably the biggest component of the GDP number. They propped up our GDP and didn’t put us into a recession, in other words like the rest of the world.

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We were growing in mining investment. What we’re talking about here is capital expenditures. I don’t know how much the mining companies pay in wages, but capital investment of a mining company. They build a new mine, they build all the roads and infrastructure that goes around the mine. That big investment that the mining companies build to increase their capacity to take more stuff out of the ground.

They increase their capacity to take more stuff out of the ground to meet the demand that it’s coming from China, India, Korea, Japan, et cetera, our Asian partners. People who we export 75% of exports. I’m going to come to that as another important point. That mining investment is very, very important. It’s the amount of money that mines increase their capital expenditure. The word is increase.

I’m not saying they’ve stopped capital expenditure, but are they increasing, are they planning to increase their capacity beyond where they planned three or four years ago? They only do that when demand for their product increases, so when you hear about that China is growing at 7%, which is a little over where it’s been growing over the last few years, and the Chinese economic political is talking about maintaining 7%, that means China is our biggest export partner. 25% of our exports go to China.

That means that we are less likely to be increasing our exports to China which means we are less likely to need more capacity because we’ve got a huge amount of resource here. We’ve got less likely to have more mining capacity to get all the resources out. Therefore, if we don’t have more demand for our product, and we have less need to build our capacity, it means the mining number will shrink. The net mining capital expenditure of the GDP number will shrink.

That’s where we are now. When you read about it in the papers, mining companies have topped out, they’re not spending more money, they’re spending the same and not spending more money, that’s because China and those places are flat-lining in terms of their extra demand in terms of what we are delivery. It doesn’t mean we are delivering less resources. They’re just growing at a slower rate in their capacity, their ability to mine more. That part of the component of business investment is down.

Non-mining investments is what everyone else spends, the rest of them, every other business, small business owners, medium-sized business, banks, whatever, IT expenditure, new premises expenditure, new business expenditure, capital stuff. Capital, stuff where we borrow or we tap the share market, or we spend our retained earnings, that sort of expenditure.

The Reserve Bank has made it pretty clear. Their analysis which gets done every six months, they print a report on the financial health of the economy, they’re saying, from their surveys, a lot more improvement is necessary before hiring or investment increases. We’re not going to any up-kick in the GDP number to get us at trend, or above trend growth for GDP from either one of those two components.

The stuff you read, you’ll be able to fit into all this sort of stuff, all these components, when you read it, you’ve got to put it into context. There’s no point in reading this stuff in the newspaper and not having a context, otherwise it just goes in and goes out.

Government investment. Look, the government is not going to investment any money. The government investment component of the GDP number is going to be flat. When you hear hockey-talk about going to the states and getting this encouragement in the states, sell their assets off, and then there’s going to be some sort of matching by the federal government. That’s going to take years.

The next two years I don’t expect to see any government investment over and above what they’re currently doing. I’m talking about extra government investment, in fact, we might even see less government capital expenditure, government, the public servant employment. You’re not going to see more, you’re going to see less. You’re not going to get anything from them.

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