The Australian economy and self-storage

The Global Financial Crisis now commonly known as the GFC occurred from late 2007 and continued throughout 2008. Not many people actually realise just how close we all came to severe depression. Unbelievably, the aftermath of the GFC is still being felt across parts of the world and many countries like the struggling US economy is just managing to maintain moderate growth following significant monetary stimulus. So what about Australia?

Well I am no economist but here is my take from what I have read and experienced. Australia managed to avoid the worst of the GFC for various reasons. The most significant of these was the mining boom driven by exports to China that managed to keep Australia relatively insulated from the worst of the fall out. The RBA also did a good job of lowering interest rates late in 2008 to help stimulate the economy (albeit a little bit late in my view). The fact that we had strong well capitalised banks also played a large part. This coupled with Government spending kept the economy ticking along while most others around the world  entered recession.

So where are we now? Why is consumer sentiment still poor? Why is retail in particular struggling? Here are some interesting points to ponder that will affect how our economy performs over the next few years.

  • Consumer sentiment (aka confidence) is still very low despite the lowering of interest rates and some improvements in Europe.
  • The Australian dollar is still stubbornly high despite commodity price drops and a drop in interest rates.
  • New house building is at very low levels (lower interest rates should help and small improvements are evident).
  • The sharemarket has been in a 5 year secular bear market with investors taking money out of shares and putting it into term deposits.
  • Some retailers are struggling with the high $A but more importantly with the threat of online sales and low discretionary spending.
  • The Australian  “Savings Rate” is still at elevated highs as consumers choose paying down debt over spending (also effects retailers).
  • The mining boom looks like it will peak this year or next and will provide a strong headwind to the economy as it pulls back.
  • Interest rates are now in a downward cycle which is good for mortgage holders and sharemarket investors but not great for savers and those with cash investments.

So here are some of my thoughts and predictions for what they are worth (predictions only!):

  • The Australian dollar will drop below parity with the US dollar over the next 12 months (will help companies that export and have overseas income).
  • Interest rates will drop by at least another 25 to 50 basis points.
  • Home building will increase on the back of lower interest rates and new home buyer incentives introduced recently.
  • The mining boom will temporarily end on the back of a shift in the Chinese economy. This will be a painful but temporary set back as China continues to grow long term.
  • Inflation will remain low for an extended period allowing interest rates to stay reasonably low for the foreseeable future.
  • Unemployment will rise on the back of the decline in the mining boom but the economy will re balance as a result.
  • The savings rate will reduce in the next 2 years as confidence returns and people start to spend again on discretionary items.
  • The secular bear market will end in the next 2 years and a strong bull market will emerge in the sharemarket. This will help consumer and company confidence going forward.

So what does all this mean for the Self Storage industry? It is all very positive and while it will take some time to play out I think the self storage industry is in for some better years ahead. This will be a result of a decrease in interest rates, increase in home building and sales, increase in consumer spending, a modest increase in property values and improving conditions for small businesses. It will be very interesting to see how it all plays out in the years ahead!

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