Why GDP Woes Could Be Good News for This Sector

You’ve got to applaud Frydenberg’s spirit. He certainly knows how to put on a brave face in a dire situation.

In case you missed it, GDP was up (barely) during the September quarter. A 1.7% lift certainly suggests we’re not going backwards anyway.

Whether we’re actually going forward though, is up for debate.

Here is what the treasurer had to say on the matter:

Australia is back in black and back on track.’

But, he followed that up with a slight digression, noting:

People are getting more money in their pocket through the tax cut, but they’re not spending it all, they are definitely saving, and that has increased.

In other words, consumption is still in limbo. Which, is bad news for the broader economy.

Unless spending starts to pick up, expect to see corporate profits stall. No doubt Frydenberg and the business sector will be hoping for a big holiday season to provide some reprieve.

I wouldn’t count on a blockbuster Christmas though. Not when Dr Lowe has already been doing his best to impersonate jolly old Saint Nick.

All those interest rate cuts appear to have done very little to improve real consumption. In fact, I wouldn’t be surprised if a good chunk of GDP is simply lining real estate agents’ pockets. Property has been the clear winner of the RBA’s strategy so far.

Which begs the question, where is the fiscal stimulus?

Clearly monetary policy isn’t working. So why isn’t the government doing its bit?

The answer, of course, is the surplus.

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Finance fetish

At the end of the day we have to remember the government’s be all and end all is a budget surplus. We’ve known that since the election.

The PM rode into the top job on the back of his economic prowess. Insisting that he would finally start paying down our national debt with budget surpluses.

In a vacuum, this isn’t a bad strategy. In fact, a surplus itself is usually a sign the economy is in good shape.

Right now though, given our GDP data, I don’t think anyone is thinking that. Our economy isn’t as crash hot as everyone had hoped.

Which makes the need for a surplus a peculiar decision. It’s like putting the cart before the horse.

If consumption doesn’t improve the flow-on effect will lead to less tax. That’s on top of the legislated tax cuts too. So, the surplus itself is at risk if the economy goes belly up.

Trouble is, the government basically promised a surplus. If ScoMo and Frydenberg don’t deliver one it will reflect poorly on them. A move that could be political suicide.

It’s easy to see why they’re doing what they’re doing, even if you don’t agree with it.

Hell, you might even be on board with the slowing growth. Some people will argue that letting the economy cool off isn’t a bad thing.

Long term though, no government is going to want that.

It’s been almost three decades since our last technical recession. Whether by luck or design, our country has enjoyed unheard-of prosperity.

Now, imagine what will happen when it comes to an end. The response and outcry against the government who snaps this streak will be bonkers.

It won’t even matter if they caused it or not. The perception and media spin will ensure they never live it down.

In short, it’ll be a bloodbath.

That’s why I suspect talk of surpluses won’t be hanging around all that long.

We’ll likely get one in the upcoming budget. Just to ensure they deliver their key election promise. But, after that I think the government may change its tune.

Which means, as an investor, I’d be keeping an eye on one sector in particular…

Building our way out of a slump

A little over two weeks ago, Scott Morrison gave a speech to the Business Council of Australia.

Between the usual pandering and PR, there were some interesting tidbits. In particular, this commitment to bring forward infrastructure spending:

Shortly after the election, I wrote to all state and territory leaders and I asked them to identify the infrastructure projects that could be accelerated.

I’m pleased to announce that as a result of that process we have been able to bring forward $3.8 billion of investment into the next four years, and that includes $1.8 billion to be spent both this financial year and next year.

Not on the never, never, this financial year and next year.

This is just a taste of the much bigger $100 billion infrastructure plan though. One that is supposed to roll out gradually over the next decade.

However, I suspect it could roll out far quicker if the economy doesn’t start improving. It is the ace up their sleeve for when things get really ugly.

For infrastructure-based stocks, it may also be the lifeline they need.

Companies like cement-maker Adelaide Brighton Ltd [ASX:ABC] for example, have fallen out of favour in recent times. Its share price has halved since its peak in mid-2018.

Watch These 10 Aussie Mining Stocks Go NUTS in 2019 (No.8 Is A Ripper!)

With this looming infrastructure boom on the way though, this stock could be a big winner. It all depends on when and what sort of projects go ahead.

This is just one example though. There are plenty of companies on the ASX that could benefit from an infrastructure boom. Both big and small.

It may just provide the jumpstart our economy needs.

Regards,

Ryan Clarkson-Ledward,
Editor, Money Weekend


Ryan Clarkson-Ledward is one of Money Morning’s junior analysts. Ryan holds degrees in both communication and international business. He helps bring Money Morning readers the latest market updates, both locally and abroad. Ryan tackles all the issues investors need to know about that the mainstream media neglects. Ryan’s primary focus is assisting Sam Volkering with background research and insight for readers by dissecting the latest events affecting the world. Working closely with Sam, they explore the latest in small-cap and technology stocks as well as cryptocurrency opportunities. You can find Ryan’s contributing research, developments, and supporting information across several e-letters, including:


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