Pete Wargent blogspot

Co-founder & CEO of AllenWargent property buyer's agents, offices in Brisbane (Riverside) & Sydney (Martin Place), & CEO of WargentAdvisory (providing subscription analysis, reports & services to institutional clients).

5 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.

"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he's one of the finest property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

"Pete is one of Australia's brightest financial minds - a must-follow for articulate, accurate & in-depth analysis." - David Scutt, Business Insider, leading Australian market analyst.

"I've been investing for over 40 years & read nearly every investment book ever written, yet I still learned new concepts in his books. Pete Wargent is one of Australia's finest young financial commentators." - Michael Yardney, Australia's leading property expert, Amazon #1 best-selling author.

"The most knowledgeable person on Aussie real estate markets - Pete's work is great, loads of good data & charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, author of the New York Times bestsellers 'End Game' & 'Code Red'.

"The level of detail in Pete's work is superlative across all of Australia's housing markets" - Grant Williams, co-founder RealVision - where world class experts share their thoughts on economics & finance - author of Things That Make You Go Hmmm, one of the world's most popular & widely-read financial publications.

"Wargent is a bald-faced realty foghorn" - David Llewellyn-Smith, 'MacroBusiness'.

Tuesday, 6 December 2016

Sydney and Melbourne driving the national economy

Engines of prosperity

When looking through the figures for the 2014 financial year, I wrote here on Business Insider of my concerns for many parts of regional Australia, with slowing population growth, employment growth, and weak investment all becoming a major worry.

While it's become popular to deride Sydney and Melbourne as parasite economies (obviously don't export much in the way of coal, iron ore, and gas) this of course overlooks the services exports that the two largest cities do make in the form of tourism, education, and financial and other services. 

For example, Sydney is by far and away by the most visited location by international tourists to Australia, an undisputed champion in this regard, while both of these capital cities have become a key destination for international students. 

Moreover, the two cities combined are utterly dominating contributions to economic growth in Australia, with more than two-thirds of the contribution to GDP growth accounted for by only Sydney and Melbourne.  

Capital cities lead

SGS Economics and Planning released its annual report into growth by capital city. 

In the two most populous states, Sydney (with a blistering +4.5 per cent growth) and Melbourne (+4.4 per cent) dominated GDP growth in FY2015-16, a trend which has now become entrenched over the last four financial years. 

In regional New South Wales the economy was flat at +0.1 per cent (negative in per capita terms, of course), while regional Victoria's economy alarmingly contracted by fully -1 per cent. 

In regional Victoria in the economy has slumped for the past four years, while average headline growth over 10 years has now slouched to just +0.5 per cent, also effectively a contraction in per capita terms. Dire figures. 

Regional Victoria in recession

Peter Martin, Australia's best economics correspondent, writing for The Age, picks up the story to note that per capita GDP in regional Victoria has collapsed by 8 per cent since peaking in 2006-7, with manufacturing crashing by a horrific 26 per cent. 

Martin cites the example of Morwell in the Latrobe Valley where multiple industry closures combined with the pending shuttering of Hazlewood has led the local economy to contract at a rate of around 2 per cent per annum.

While GDP per capita has risen to an all-time high in Sydney and Melbourne, GDP per person has declined over the past nine years in regional Victoria from an inflation adjusted $53,000 nine years ago to only $49,000 today.

Over the past 30 years Australia has shed more than 284,000 manufacturing jobs on a net basis. Moreover, these jobs are not coming back.

Terry Rawnsley of SGS noted that he cannot see the trend toward regional malaise reversing, recommending that cities such as Geelong focus instead on building strong transport links to Melbourne. Reported Martin:

"Dr Rawnsley's calculations show regional Victoria deteriorating faster relative to Melbourne than it did when Jeff Kennett lost office."

Regional NSW "recession hit" as Sydney booms

It's a similar tale of a state divided in New South Wales, with Sydney's economy accelerating to record a blazing +4.5 per cent growth compared to just +0.1 per cent for the rest of state. 

Regional New South Wales has contracted at a rate of -0.3 per cent per annum over the last four years, while Sydney has averaged a growth rate of +3.4 per cent. 

Sydney contributed 38.6 per cent of all of the national GDP growth in the financial year, the harbour city's highest share since 1992, while Melbourne contributed another 28.4 per cent. 

Matt Wade reports the Sydney side of the story for the Sydney Morning Herald:

"Rawnsley, an expert on regional economics who authored the paper, said the figures revealed a worrying pattern where a disproportionate share of economic activity and population was shifting towards the biggest cities.

This is an alarm bell ringing louder and louder. How will we manage this tidal shift of people into the city? Sydney's population could grow by more than 2 million people over the next 20 years."

Rates differential

These figures are worth remembering when people talk of parasite economies. 

Strewth, without the contributions of Sydney and Melbourne there would be no Australian economic growth of which to speak. 

Such is the difference between the respective conditions that if they were operating as standalone economies SGS estimates that Sydney would have a cash rate of 3.75 per cent and Melbourne 2.25 per cent.

On the other hand, given the recessionary conditions in the rest of state areas interest rates would need to be immediately cut to the effective zero lower bound for regional New South Wales and Victoria. 

That's how stark the difference in conditions is. 

Unfortunately the Reserve Bank has only one lever or blunt tool, and as such left interest rates on hold today at 1.50 per cent, which is obviously a stimulatory setting for Melbourne, and hugely so for Sydney where the unemployment rate has sunk to well below 5 per cent. 

On a related note, more GDP partials were reported today suggesting a possible negative print tomorrow.

Hold onto your hats!