The Challenge Facing Australia
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Interest rates are at record lows.
New housing loans are soaring, with commitments at record levels.
Auction clearance rates are climbing.
While private residential building approvals have taken off.
But non-mining business investment is plunging.
Ultra-low interest rates have boosted demand for housing. Especially with major banks projecting a 20% increase in house prices by the end of next year. Banks, inundated with record numbers of new mortgage applications, are happy to splash out in the housing market with house price inflation expected to bail them out of any poor lending decisions.
Business applications are unlikely to be met with the same enthusiasm. An uncertain economic climate and recent high default rates make it likely that only the most blue chip of investments win approval.
The problem is that as business investment withers, so does growth.
Productivity requires new investment in more efficient plant, equipment and processes in order to grow (the old analogy of 20 workers with shovels versus one with a bulldozer comes to mind).
New investment creates new jobs, so job growth slows if there is no investment. Then wages growth slows, completing the trifecta.
Conclusion
The focus of the whole economy needs to change from housing to business investment. If we don't make capital investments to improve efficiency and productivity we will fall increasingly behind. Unable to compete in the global economy -- other than digging holes to supply China and other modern economies with commodities needed to run their manufacturing industries.
Quote for the Week
~ Stephen Pastis
Acknowledgements
Hat tip to IFM economist Alex Joiner for the chart on non-mining business investment.
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Colin Twiggs is director of The Patient Investor Pty Ltd, an Authorised Representative (no. 1256439) of MoneySherpa Pty Limited which holds Australian Financial Services Licence No. 451289.
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