Two paced economy continues in disparate directions: Colliers' Nerida Conisbee

GUEST OBSERVER

The Australian economy continues to show sub-trend growth, facing headwinds caused by falling commodity prices and a hangover from one of the largest mining booms. Whilst the New South Wales and Victorian economies pace ahead, the Western Australian and Queensland economies continue to experience challenges as their resource driven growth continues to decline.

At its meeting on Tuesday, the RBA Board decided to keep the cash rate unchanged at 2.00%. 

Key points raised regarding the decision by the Bank include the following:

• Australia's two paced economy continues in disparate directions as the eastern states pull ahead with solid economic performances.
• Australian dollar reaches the lowest level since May 2009 on the back of US economic data and declining commodity prices.
• Greek debt crisis fallout averted, however, concerns remain over Chinese share market volatility. An estimated $US450 billion of capital has flowed out of China in last four quarters according to JPMorgan. Australian real estate likely recipient as this trend is expected to continue.
• Unemployment continues to show positive signs with a benign increase from a revised 5.9 percent in May to 6.0 percent in June. The eastern seaboard office demand to increase as unemployment remains on steady decline while economy adjusts away from commodity driven growth.
• The eastern seaboard industrial and logistics sector to show strong growth as merchandise trade volumes increase.
• Retail turnover growth remains slow, but healthy, as South Australia and New South Wales demonstrate strong growth. Turnover growth forecast as Australian dollar forecast for record lows.
• Strong economic fundamentals encouraging the re-rating of market yields

The economic recovery is back on track having averted a fallout Greek debt crisis, however, potential for further corrections in the Chinese share market are likely. According to JPMorgan, a capital outflow of $US450 billion from China has occurred in the last four quarters. Australian assets have been a major destination of these outflows due to their high risk adjusted return. This is expected to continue as volatility in the Chinese share market continues. Economic data from the U.S revealed a lower than expected second quarter growth. Although the annualised rate of 2.3% was higher than the 0.6% in the first quarter, it fell short of expected forecasts. However, the Fed has signalled that it remains poised for an interest rate hike this year, potentially as early as September. In light of this announcement, the Australian dollar reached a fresh six year low of $US72 cents on Monday.

Given the continuing decline in commodity prices and the probable near-term U.S interest rate hike, the Australian dollar will likely fall below the $US 70 cent mark by the end of the year. This will increase the demand for Australian property assets as they become relatively cheaper for both domestic and offshore investors. Domestic retailers will also benefit from this as the declining dollar will increase the demand from online shoppers, brick-mortar stores and an influx of inbound tourism. The industrial and logistics sector must also respond to increased retail activity and the increased demand from the manufacturing and agricultural sector as conditions ease with the dollar.

In consideration of the recent historically low growth period, the RBA Governor last week indicated the RBA would revaluate its assumption on trend growth. However, in the interim, the forecasted growth of 2.5% remains below the currently assumed trend growth of 3-3.25%. However, the Victorian and New South Wales economies continue to demonstrate strong economic fundamentals with steady growth rates, reducing unemployment, retail turnover growth and increased international trade volumes. These strong fundamentals have encouraged a re-rating of the market as sharper yields from major transactions begin to crystallise. Aside from the CIC acquisition of Investa portfolio transacting at an initial yield of 5%, Blackstone's patrial acquisition of 161 Castlereagh Street and the Qatar Investment Authority's share of Barangaroo Tower 1 were at a yields below 6%. These sharp yields are continuing to emerge in the industrial and logistics sector.

The Coles Chilled Distribution in Eastern Creek was purchased by Mapletree Investments for $253 million with an initial yield of 5.6%. Additionally, KWAP Pension Fund purchased an asset in Lenore Drive, Erskine Park for $79.5 million at initial yield of 5.97%.

In the year to March, New South Wales and Victoria continued to show solid economic growth. The South Australian economy was the only mining-heavy economy to show strong growth. This growth was underpinned by solid population growth, housing construction and retail spending. However, the South Australian economy faces grim times ahead as its unemployment rate in June reached a 15-year high resulting from the long expected stripping out of manufacturing jobs.

Employment figures have stabilised since the latter part of 2014. Previous concerns of the national unemployment rate surpassing 6.5% in the coming year have now subsided. Unemployment rates on the eastern seaboard continue to decline and momentum in demand for office space continues. Unemployment in New South Wales, Melbourne and Queensland has declined steadily since January, whereas the Western Australian and South Australian markets continue to struggle. A depreciating Australian dollar is poised to assist the services sector as blue collar employment regains momentum with increased demand from Australia and the greater region alike.

The industrial and logistics sector is currently experiencing a shift as the growth shifts towards the eastern states. The downward trend in the Australian dollar and the economic growth has had a positive impact of international trade volumes on the eastern seaboard trade hubs. Conversely, the declining commodity prices have had a pronounced negative impact on trade volumes on the western seaboard.

These disparate rates were also present in retail turnover growth. New South Wales and South Australia showed strong retail growth underpinned by strong population growth and housing construction. As discussed earlier, retail trade is expected to benefit from the depreciating Australian dollar and increased tourism. Additionally, New South Wales, Victoria and Queensland are expected to show strong retail turnover growth in line with higher gross state product forecasts.

Nerida Conisbee is national director of research for Colliers International.