Part 2: Macroeconomic Perspective
Welcome to part two of my guest post on Hedgeable’s “Musings of the Intercontinental Investor” series detailing my business/cultural trip to Australia. In my first post, I introduced the series and shared my experiences during my captivating layover in Beijing. In this week’s post, I will focus on what I find to be some fascinating facts about the macroeconomic climate in Australia.
We arrived in Sydney after a surprisingly comfortable 12 hour flight from Beijing. It is a beautiful city and we were fortunate enough to stay near the picturesque “Rocks” area close to the famous Opera House. Sydney is an extremely clean and modern city full of cafés and restaurants. The downtown area is bustling yet very orderly and civilized. It oozes wealth, which is not surprising when one considers Australia’s vast natural resources, its small population and the huge industries that dominate its economy.
Australia only has 23 million inhabitants despite being the 6th largest country in the world by land mass. Its population density is among the lowest in the world and is concentrated in its major cities (over 89% of the population is urban), primarily in Sydney and Melbourne. Despite the continent’s small population, Australia is home to some of the world’s largest companies in the mining and banking industries. Its economy is highly concentrated in these and a few other sectors such as manufacturing and agriculture.
When one considers Australia’s wealth relative to its population, it is not as shocking to see why the country has the 4th largest pool of retirement assets in the world after the U.S., Japan and the UK. In fact, the pool of almost $2 Trillion is larger than the Australian GDP. The government also mandates that all employers contribute to their employees’ pension plans (10% in July 2015, and increasing to 12% in 2019) ensuring continued growth. Furthermore, citizens are allowed to invest in real estate and other privates with their retirement savings (except their own house). As a result, many invest in their own business property providing the economy with a high percentage of small business ownership.
One thing that I was surprised to learn while I was there was the high interest rates that banks pay (enormous compared to the U.S. at over 3% in some cases) for deposit and savings accounts. Inflation rates are not that high but the cost of living in the major cities is. For example, in Sydney, many property owners are millionaires as real estate values have appreciated immensely and consistently over the past two decades. In fact, some people I spoke with were worried about a real estate bubble and correction.
Australia is a very wealthy country and even though it has a concentrated industrial base, its sheer size and vast resources will make it a desirable place to invest for years to come. The country is attracting numerous immigrants and as the population grows, so will its skill set and the diversity of economic activity. I am confident that Australia’s economy will continue to flourish and become an even larger player in the global economy in the future.