The Australian economy will be constrained by three realities in the coming years, according to a recent article in Business Spectator. Here's why.
Firstly, the unemployment rate will continue to rise, due to both to retirements among the aging population and people giving up the search for work. This will negatively impact house prices as historically they have been linked to employment prospects. Additionally, there is little impetus provided by prospective first home buyers, with investors largely driving current price rises.
Further woes will arise from the difficulty in returning to a budget surplus. This would result from a potential decline in the terms of trade (as rising business investment fails to mitigate the loss in mining investment). Also, the aging population will dramatically reduce tax receipts. This may well lead to an austerity drive by the Coalition government. Austerity will be counter-productive as proven in the European experience and lead to greater job losses.
Finally, slower growth will become the new normal as Australia's inherent lack of productivity makes our country increasingly uncompetitive. In addition, a potential delay to tapering in the US will further delay the necessary adjustments to our economy by preventing a fall in the Aussie dollar. This will necessitate intervention by the Reserve Bank to further lower interest rates.
How will this affect ASX listed stocks?
Rising unemployment would affect housing-linked stocks such as real estate advertising company REA Group (ASX: REA), which would suffer a decline in transactions. Australia's largest residential developer, Stockland (ASX: SGP), would also suffer from declining sales as would real estate investor and developer Mirvac Group (ASX: MGR).
Commonwealth Bank (ASX: CBA) has the largest share of the mortgage market, closely followed by Westpac Banking Corporation (ASX: WBC). Commonwealth is also the Aussie bank with the most exposure to household debt and would doubly suffer via a rise in bad debts and less consumer borrowing, thereby making it harder to maintain both profits and dividends.
Should the Reserve Bank be forced to lower interest rates further, stocks like Telstra (ASX: TLS) would prosper from a further decline in interest rates as its dividend is relatively more attractive. This would likely outweigh any rise in bad debts arising from the distressed consumer.
Foolish takeaway
In my opinion, in order of importance, the biggest risks to the Australian economy are the mining investment cliff, austerity measures by government and delayed tapering by the US Federal Reserve restricting the fall in the Aussie dollar.
Should evidence begin to emerge of an inability to replace mining investment and/or the introduction of government austerity measures, investors should consider either trimming or selling holdings in negatively affected shares.
