Many investors are worried about the housing market slump in Australia, and whispers of a recession have been doing the rounds.
Investors are worried that the negative wealth effect of falling house prices could lead to a cut in consumer spending as Australians feel poorer. They’re also concerned a fall in housing construction will directly impact economic growth.
We agree the housing market is going to be a big drag on Australian economic growth, taking one to one and a half per cent off growth, and causing growth to be subpar.
Growth will almost certainly be well below what the Reserve Bank of Australia (RBA) has been looking for, and that will ultimately lead them to cut interest rates a few times in 2019; I’d say by the end of the year we’re looking at a cash rate of around one per cent.
But by the same token, we don’t see the Australian economy heading into a recession, as many fear.
There are five reasons for that:
So as the Australian dollar comes down that provides support to the Aussie economy.
For those five reasons we don’t see the Australian economy going into recession – even though we do see sub-par economic growth of around two and a half to three per cent and this will be weak enough to drive lower interest rates.
If the economy keeps growing at a reasonable rate, that will support profits and, ultimately, we see the share market heading higher by the end of 2019 and ending higher than it is today at around 6000.
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