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February 2019

Australia’s Economy – Building a Future

Australia’s last recession ended in the September quarter of 1991. That’s twenty eight years of uninterrupted economic growth. Before the bears start mauling us, we concede that twenty eight years of growth does not mean twenty eight years without economic difficulties. But it is impressive, nonetheless. Frankly, it’s the envy of the developed world.

One feature of the economy, particularly since the global financial crisis (GFC), has been its ability to find new growth drivers at different points in the cycle. As one growth driver has faded, a new one has stepped into its place. In this edition of Investment Enews, we take a look at Australia’s economy since the GFC and consider some of the likely key drivers for the next stage of our economic history.

Australia’s Economy – Building a Future

Australia’s economy since the GFC has been a show in three parts. Act one was the post GFC mining boom. Our key trading partners – especially China, but also Japan and South Korea - developed an almost insatiable appetite for our natural resources. The response of our resource-rich states was to initiate our largest ever capital expenditure boom. New mines, processing facilities, train lines and port expansions were part of what kept Australia’s economy performing so strongly when the rest of the world was in the doldrums.

Act two commenced as resources-led capital expenditure peaked and began to subside. As Australia’s population grew at a rapid rate, the slack created by reduced resources-related expenditure was picked up by the construction sector. The long-standing dwelling shortfall provided the impetus for the demand that drove a record housing construction boom. The epicentre of the boom was the eastern seaboard, with Sydney, Melbourne and Brisbane all hitting record heights. Both apartment and house and land stock entered the market in record levels. This fuelled jobs and household expenditure and continued to support Australia’s economic growth.

We are now entering act three of the post-GFC economy. Record stocks of new homes are still coming on line in Sydney and Melbourne and are currently weighing on house prices. However, approvals have peaked and are falling rapidly. There is a very real prospect that the second half of 2019 could see us moving towards a structural supply shortfall in the housing market again as construction activity fades.

From the point of view of the overall economy, this raises a potentially uncomfortable question. From where will Australia’s growth come in the years ahead? After all, there are around 900,000 employees in the residential construction industry.

One answer could be that we should not be looking for a ‘saviour sector’ that will single-handedly protect the economy from downturns. A diverse and sophisticated economy will evolve organically over time to deploy resources to meet the needs and wants of the population. And that answer should not be disparaged. Australians love to hear about records – record spending, record booms, record market highs and so on. But economic heavy lifting is usually done by thousands of tiny adjustments across our economy that, in aggregate, make a difference.

However, there is at least one sector that appears to be gearing up significantly. The infrastructure deficit to which so many have pointed is finally getting some attention. In fact, Australia is now building up to (wait for it…) record levels of infrastructure spending. If you ever wanted a road, a port or a bridge, now is the time for you. A version of the graph below was released by Macromonitor in late 2017 and aggregated planned transport infrastructure projects. By late 2018, when it was updated (the version below), peak spending had increased by 40% and pushed out two years.

So, while this infrastructure spending might not be the complete answer to the decrease in residential construction activity, it will certainly be a strong net positive for the economy as a whole. Provided that the projects are carefully planned and executed, it should also produce economic and quality-of-life benefits for all Australians.

Australia’s Population – Still Growing Strongly

This infrastructure spending becomes particularly important in the light of recent population projections. While population growth has been a controversial political issue in recent years, there is no sign that it’s slowing down.

The Australian Bureau of Statistics (ABS) provides regular projections of Australia’s future population. Like all projections, they are not exactly predictions and they are only as good as their assumptions. As recently as 2002, for example, the ABS medium variant projection (Series B) saw Australia’s population hitting 25 million in 2032. As it turns out, higher than expected migration and fertility levels saw us hit that milestone in 2018 - a cool 14 years in advance.

Nevertheless, these projections remain a useful tool. At their best, they help to concentrate our thinking on the challenges that we will face as our demographics changes. A city of 10 million people faces a considerably different set of challenges to a city of 3 million, for example.

Source: ABS

To that end, the latest set of ABS projections provides startling reading. The medium variant projection shows Australia’s population increasing to around 43 million by 2066. By then, Melbourne and Sydney will both be around 10 million people in size. What’s more, Melbourne will overtake Sydney as Australia’s most populous city in 2037 and will be growing at a staggering 109,000 people per year. Sydney will be growing only slightly slower at 94,000 people per year. The demand that this will create for housing, infrastructure and goods and services is staggering. And that’s not even the high case, which has Melbourne growing by 151,000 per year and Sydney growing by 125,000 per year. This suggests that we are going to continue to require substantial investment in housing stock and infrastructure to keep up with demand in the decades ahead

La Trobe Financial Update

La Trobe Financial currently holds $7 billion in assets under management (AUM), of which $3 billion is in the La Trobe Australian Credit Fund. We remain focussed on delivering quality portfolios of carefully selected, highly diversified mortgage-secured assets. We maintain all of our existing ratings from Australia’s leading independent research houses (all of which are available on our website) and continue to appreciate the support that we receive from investors and independent advisers across Australia.

It is our considered view that the best measure of our performance is the extent to which we continue to deliver the capital-stable, income-based returns that characterise our investment philosophy. To that end, we are particularly pleased with the resilience of our portfolios. The 12 Month Term Account, whilst a variable rate offering, has maintained a consistent headline return profile of 5.20% p.a. each and every month since September 2015.

We are committed to continuing to deliver the highest standards of personal service and investment management to all of our investors. If you have any queries about your investments, please call our friendly investor team on 1800 818 818.

About La Trobe Financial

With A$9 billion of Assets Under Management (AUM), La Trobe Financial is Australia’s premium non-bank specialising in credit and wealth management. La Trobe Financial provide funding and investment solutions to a diverse range of 150,000 customers and have done so since 1952. 80% owned by Blackstone, the world’s largest alternative asset manager, with over US$545 billion of AUM worldwide. We are a proven and trusted investment partner for institutional and retail investors alike, operating Australia largest retail Credit Fund ($4bn AUM and 40,000 retail investors). We have over 66 years’ experience, managing investment mandates in excess of $22.76 billion since commencement.

La Trobe Financial has been a leading innovator in the non-bank sector for many years including, pioneering “Lite Doc®” lending in Australia in 1990, creating the first private Reverse Mortgage (Seniors Loan™) in 2003, launching the first hybrid wealth management-loan product P2C® (Parent-to-Child) to assist first home buyers in 2013, introducing a unique to market Aged Care finance solution in 2015, and being one of the first lenders to introduce a fully digital KYC and AML checking of borrower applicants for brokers in 2017.

La Trobe Financial Services Pty Ltd ACN 006 479 527 Australian Credit Licence 392385. La Trobe Financial Asset Management Limited ACN 007 332 363 Australian Financial Services Licence 222213 Australian Credit Licence 222213 is the issuer and manager of the La Trobe Australian Credit Fund ARSN 088 178 321. It is important for you to consider the Product Disclosure Statement for the Credit Fund in deciding whether to invest, or to continue to invest, in the Credit Fund. You can read the PDS on our website, or ask for a copy by phoning us on 13 80 10.

This publication does not constitute financial advice and should not be relied upon as such. It is intended only to provide a summary and a general overview on matters of interest and it is not intended to be comprehensive. You should seek your own financial or other professional advice before acting or relying on any of the content. Copyright 2019 La Trobe Financial Services Pty Ltd ACN 006 479 527. All rights reserved. No portion of this may be reproduced, copied, or in any way reused without written permission from La Trobe Financial.

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