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Australia’s Spending Wave and outlook for 2010 and beyond

In my earlier post Case for Deflation – Part 2, I talked about the concept of the “Spending Wave”. Do read that post first if you are not familiar with what it is. Using population estimates from the United Nations, Harry Dent has plotted Spending Wave charts for all countries in his book and they can also be found in this document The Spending Wave and Innovation Wave on his website. Australia’s Spending Wave can found on Page 24. When I first looked at it, I was quite relieved as it looked a lot healthier than many other countries in the region. The Spending Waves for Japan, South Korea, China, Hong Kong and even Singapore (all found on Pg 23-24) all show steep declines after 2010 (or a little later in some cases) which never recover, while Australia’s spending  is only expected to only plateau between 2010 to 2020 and actually rise a little after that.

Australia’s outlook is good, due to high immigration rates which make up for the low birth rates. I always knew immigrants affected the economy but I never realised the extent until I did a little further research. According to this media release by the Australian Bureau of Statistics (ABS), Australia had a mini population boom last year, which was equivalent to the baby boom years in the 1950s and 1960s. Our population grew by 2.1% which is nearly double the growth rate of 1.2% five years ago. As at 31 March 2009, Australia’s population had increased by 439,100 people over the previous year. Sixty-three percent (63%) of this growth was a result of immigration. Natural increase only contributed 37%. Unlike new babies born who will not be able to make any significant contribution to our country’s spending for at least 20 years, each new immigrant family are immediate big spenders as they all need to buy (or at least rent) a house, a couple of cars, and many other big ticket household items soon after they arrive. Unlike natural population growth, the government can choose who they accept as immigrants. All immigrants have to undergo health checks and only healthy people are accepted. Based on the Migration Program Statistics from the Department of Immigration, 67% of immigrants were accepted under the Skills program, which means that they are young and have skills that Australia needs, so they are likely to get jobs and be able to continue to spend and pay taxes, etc.

However, all is not hunky-dory just because we have a reasonable Spending Wave as consumer spending is not the only thing that impacts the economy of a country. Exports contribute 14.5% to our Gross Domestic Product (GDP). Australia’s main exports are commodities like coal, iron ores, tin ores, wool, beef, barley, and raw sugar. The top 5 countries that Australia exports to are China, Japan, US, UK and South Korea. Most developed countries are expected to experience a slowdown in their economies after 2010 so commodity prices are expected to slump as demand declines. Harry Dent also observes that there is a 29 to 30 year Commodity Cycle and that is also due to peak in 2010. Australia’s economy will be significantly impacted by a fall in commodity prices.

In his visit to Australia in June 2009, Harry Dent says the worst is yet to come for the Australian economy in this news article. Although we have good demographics, our house prices are among the most overvalued in the world. “When you have to deleverage a major bubble in stocks and housing and commodities . . . it doesn’t just get over with in one year with a nice stimulus program,” he says. In the crash ahead for the global economy within the next two years, we will fare better but we won’t come out of this unscathed. He predicts that Australia’s sharemarket will halve in value, house prices will slump as much as 40 per cent and unemployment will climb to 10 per cent.

High unemployment will also increase anti-immigrant sentiment as immigrants would be blamed for stealing jobs from locals. Immigration will slow down and some immigrants may even leave if they cannot find jobs, selling their homes when they go which will not help house prices. This is already happening in the US and you can find out more by listening to Podcast 115 on The Disciplined Investor. In Australia, Indians already feel that there is “anti-Indian” sentiment and have been very vocal about it. According to the 2008-09 Migration Program Report from the Immigration Department, India is the second largest source country of immigrants after the UK. If this sentiment is not addressed, we may see fewer Indian immigrants in the future which will be a loss for Australia as India has great demographics and is expected to be one of the most dominant global economies in the future. As a final note, the Spending Wave charts are based on current immigration rates. If the immigration rate slows down, the Spending Wave for Australia may not be as healthy as the one we currently see.

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