Weak business investment, a shortage of detached housing, greater infrastructure investment and tax reform are the key economic challenges facing Australia, according to a panel of leading economists.

Addressing delegates at the Australian Institute of Company Directors’ (AICD) Australian Governance Summit last month, the panel discussed the impact of emerging domestic and international trends on Australian boards and business and the growth of the future economy.

Debating the impact of the global political environment on Australia, Stephen Halmarick GAICD, chief economist at Colonial First State, said the markets had adopted a more optimistic than expected outlook on the appointment of Donald Trump as US president but pointed to the Brexit negotiations, European elections in France and Germany and political transition in China as additional global drivers for instability.

“The key question for me is: will Donald Trump’s policies permanently raise the growth rate of the US economy? The equity markets are saying yes, the majority of economists are saying no. I think it’s going to be a boom/bust scenario in the US, everything will look great for a year or two, then by 2020 the Fed will be cutting rates again because things will be coming down the other side,” he said.

Australian outlook

Turning the attention closer to home, the panel were keen to shrug off suggestions of a housing bubble by stressing the differences between the Australian and US property markets. “Our market is very different from America,” said AICD chief economist Stephen Walters MAICD, though he stressed there are vulnerabilities in certain areas of the housing sector.

“There are too many apartments, yes, and we’re still not building enough homes in the detached housing space. But population growth in Victoria and New South Wales is very strong and that’s supporting the housing markets in places like Western Australia where population growth and interest rates have gone negative.

“In different segments of the market I think there’s real vulnerabilities, but across the whole market, I don’t see a collapse coming at all,” Walters added.

Walters’ comments were backed up by Alan Oster, chief economist at National Australia Bank. He said: “Australia’s household balance sheet actually looks pretty good. Yes there’s about $2 trillion dollars worth of housing out there, but there’s $10 trillion dollars worth of assets out there as well.

“Australia is unusual in the sense that we have mainly variable home loans and offset accounts, which means Australians have about two years’ worth of credit, so if they lose their job they can keep paying down on average for about two years. That is not what you get in the US or any of the other countries.”

While the panelists shrugged off suggestions of a housing bubble, infrastructure investment and tax reform did come under attack. “Our debt is very low. There’s still plenty of room on fiscal policy to borrow money and then use that for productivity enhancing infrastructure. We should be borrowing for infrastructure investment because moving people and goods around a service-based economy is critical,” he added.

Walters added that tax reform would also be widely welcomed and would help boost productivity. “We tax income and profits too aggressively, and we under-tax consumption. We need to turn that around,” he said.