Global debt, Aussie housing dominant themes for 2019

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Glenn Freeman: I'm here today speaking with Peter Warnes for our forecast 2019. Peter, thanks for your time today.

Peter Warnes: Always a pleasure, Glenn.

Freeman: Looking at the bigger picture initially, a key theme that cuts across most of the areas that you are going to discuss today is global debt.

Warnes: You know, Glenn, I think that that could be the big issue in 2019. There are other issues; obviously, China and U.S. trade. But I think that the debt picture is very, very substantial. I think it's, look, a record debt globally and we've got a Fed that's sending mix signals. And I do think that it really is Fed watch time in 2019.

Freeman: Now, moving into Australia and sort of cutting down to a slightly smaller picture, it is housing. And you've spoken here about the correlation – or the strong correlation between house prices and GDP.

Warnes: You know, Glenn, look, it's not so much housing prices directly and their implication on GDP. It's more household consumption and its link to GDP. And it is the biggest single contributor we have been saying ad nauseam 55 per cent to 60 per cent of GDP comes from the household consumption. And that is individually and collectively bigger than any of the other contributors. So, falling house prices will have a negative wealth effect and that's psychological. And that can feed into consumer behavior and consumer sentiment and then what happens to consumption.

Now, what you've had over the last three years is that consumption has held up quite well. But it's been supported by a fall in the savings ratio and the savings ratio in the last three years has come from around about 10 per cent to now a 10-year low around about 1 per cent or 2 per cent. Now, that can't continue because piggybank hasn't got anymore money in it.

Now, if in fact what happens is that the consumer because of this negative wealth effect and falling housing prices becomes more cautious and then that caution leads into a turnaround in the savings ratio. So, in other words, the savings ratio starts to go up. That is not good news for consumption because he is saving more and consuming less.

Freeman: The other aspect here, which without giving too much time to that really, but it is the political outlook in Australia too. We'll have an election in May next year following the budget in April.

Warnes: You know, Glenn, it's probably more a nuance factor than anything else. What tends to happen is the consumer goes into its shell pre the election and a bit after the election. This time you've got issues around negative gearing, franking credits, capital gains tax or what have you.

Now, whether or not the Labor Party comes into power and I suspect that's what the polls were saying, but it looks like a hostile senate going forward isn't going to let that through anyway. So, there might be some breathing space here.

But the sun is setting for investors, particularly superannuants who were trying to put long-term strategies in place and every time there's a change in government or even if there's no change in government, all they do every year is fiddle with the rules and regulations around superannuation.

Now, how can you possibly set a long-term strategy when these blokes in Canberra are fiddling around and putting things on the table and taking more things off the table. It's crazy. They should just get out of superannuation and leave it alone. And the sooner they do that, the better. So, no, I think we'll just muddle through whatever happens in May.

This report appeared on 2022 Morningstar Australasia Pty Limited

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