Signs of life in the Aussie economy

New dawn ... there are encouraging signs for the Australian economy, writes Jessica Irvine. Source: News Limited

THEY say that the night is darkest just before dawn.

And that appears to be just the case with the Australian economy.

It's fair to say the gloom has been suffocating. High profile job shedding at Holden, Ford and Toyota have grabbed the headlines, along with the end of the mining boom and the rising joblessness.

But many commentators have written off the Australian economy too soon.

There's life in the old girl yet.

Growth is picking up pace.

National accounts released last week show the economy grew 2.8 per cent last year — not too far below its long term average of about 3 per cent.

For some time now, the Reserve Bank has been like a nervous fire starter who has thrown all the kindling on the heap it can, and can only wait impatiently for it to ignite.

It's also unclear whether the nascent property and consumer boom will fully fill the hole left by the receding mining investment boom.

No-one can answer that question with great confidence.

But there are now flickering flames of life in the Australian economy.

And it's to be a property led recovery. Car sector workers looking to retrain could do worse than a career in construction.

In his testimony to a parliamentary committee hearing on Friday, Reserve Bank governor, Glenn Stevens, revealed a telling figure.

There were almost 50,000 new homes approved for building in the past three months. That's a 27 per cent rise from the figures of a year earlier and is the highest three month total in the 30 years the Bureau of Statistics has been measuring it.

And we're not done yet.

"Construction of dwellings is set to rise, probably quite strongly," Mr Stevens predicted.

A number of stars have aligned for new home building.

First, interest rates still work. It has been a nervous wait, but households are borrowing again.

Investors, in particular, have taken a renewed interest in property precisely because the returns on savings are so low. That's, in fact, one of the major ways that lowering interest rates stimulates the economy, but reducing the return on saving.

Foreign investors too are fuelling a boom in inner city apartments.

House prices are rising again — painful for first time buyers but mood enhancing for existing owners (who make up two in three households).

Households, who have maintained a vice like grip on the money strings since the GFC, are beginning to spend again. Retail sales figures for January were unusually strong. The household savings ratio has fallen to its lowest in about four years.

But Stevens isn't popping the champagne corks just yet.

Consumers, he says, are likely to remain "skittish" and the last thing we would want is a property bubble.

"People need to keep in mind that prices do not just rise; they can fall and have fallen," he warns.

The Aussie dollar also remains stubbornly perched just above US90 cents, a level which Stevens has said is too high.

Nonetheless, the jobless rate, now at 6 per cent, is expected to peak early next year before falling.

But those looking for a turning point in the economy need to focus on growth, not jobs, because the labour market is what economists call a "lagging indicator". Growth has to pick up first before businesses have the confidence to start hiring again.

Much will still depend on the future path of the dollar. For many businesses, even just a one cent fall in the dollar can help more than an interest-rate cut.

And the Reserve Bank has made it clear it has done all it can, for now, to fan the flames of recovery.

Joe Hockey's May budget presents a potential stumbling block as the government seeks to repair the budget books and pay for all the medium term spending commitments that both parties agree to — like disability reform — but are as yet unfunded.

Many economists are cautioning the government against spending cuts which could sap activity.

But the best time to fix a budget is when the sun is shining.

And dawn is finally here.

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