In Brief: China Housing, Financial Hardship, Retail, Beef

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Weekly broker wrap: policy interventions shape housing downturn, financial hardship remains, retail margins resilient, beef supply to decline.

-China’s housing downturn looks to take different shape
-More Australians facing severe financial hardship
-Low risk of retail margins suffering from forex movements
-Beef supply to contract over 2023

By Danielle Austin

Policy drives a long, slow downturn for China’s property market

With China’s policymakers implementing measures to avoid a drastic economic downturn, analysts are predicting a resultant boost in house prices will give way to a more prolonged decline and a soft landing, compared to the steep fall of preceding housing market declines. Oxford Economics maintains the decline of the Chinese housing market is one of the biggest wildcards the global economy will face in the coming year. 

A decline appears imminent, with the Chinese housing market already exhibiting characteristics of previous housing market declines, including rapidly rising prices, rising housing inventory levels, and rapid credit growth. What remains less certain is what shape that decline will take.

Unlike in previous housing bubble bursts, China has stronger policy measures at its disposal which could shape a different recovery. Policymakers are working to avoid a sharp housing market correction, which could undermine economic and social stability given the economy's sizeable reliance on its real estate industry. Oxford Economics estimates real estate accounts for 24% of China’s gross domestic product, meaning its economy is more reliant on the sector than other property markets ahead of downturns. 

Oxford expects policy intervention to avert a sharp correction, and predicts a lengthy L-shaped recovery for China’s property market. The economists assumes China will deliver 3.0% economic growth over the next five years, lagging its average economic growth rate of 4.0-4.5%. It assumes a more severe downturn is unlikely. 

Average rates of financial hardship retained, but more concentrated at the top end

New data from National Australia Bank paints a skewed view of financial hardship in Australia. Despite rates of financial hardship appearing to have risen for the second consecutive period, Australians continue to believe they are coping well on average with making ends meet. An increased number of Australians, however, reported feeling they are experiencing more severe financial hardship.

Around 19% of participants reported struggling very much with financial hardship, with Victoria and Western Australia reporting the highest levels. Western Australia also reported the highest number of participants who found they were experiencing any form of financial hardship. 

The bank reported more than one in three Australians were experiencing financial hardship. Participants listed not having sufficient funds for food and basic necessities, or for emergencies, or being unable to pay a bill, as being the top causes. Notably, the least common causes included being unable to meet mortgage, credit card and personal loan repayments, despite recent interest rate hikes. 

The bank’s survey also suggested that of those experiencing financial hardship, three in ten relied on credit cards or friends and family to make ends meet. 

Retail margins prove resilient to foreign exchange movement 

Macqaurie anticipates an ongoing decline of the Australian dollar will have little impact on gross margins of retailers. On analysis of the impact of foreign exchange movements on Australian retailers with high exposure to imports, the broker found surprisingly little correlation to a falling Australian dollar. 

Within its coverage, Macquarie identified retailers with large exposure to imports as JB Hi-Fi ((JBH)), Wesfarmers ((WES)), Harvey Norman ((HVN)), and Woolworths Group’s ((WOW)) Big W business. 

The broker remains cautious on discretionary retailers into 2024, citing risk that demand for non-essentials declines rapidly as rising rates place pressure on household budgets. Macquarie retains its preference for staple retailers, highlighting supermarkets and food & beverage retailers are less exposed to import risk with more of its stock sourced domestically. 

Supply and demand-side issues compete to drive beef pricing outlook 

The US looks to increase its beef imports over the next three years as domestic production declines. While this creates opportunity for exporters, supply constraints mean Australian producers will be challenged to find additional export volumes to meet demand. 

According to Rabobank, supply constraints across a number of beef-producing nations will likely drive a global increase in pricing. While the size of the US cattle herd has been declining steadily over recent years, to date it has not impacted on production reaching consumers, but Rabobank anticipates a -3% cattle herd decline in 2023 will be a catalyst. Following this, the bank assumes further declines of between -2-5% annually through to 2026. 

It is expected the US will look to beef exporters to address its supply gap. Mexico and Canada, its largest suppliers, will likely fill some of the gap, but Rabobank highlights Canada is experiencing its own herd decline. While Australia and New Zealand offer export alternatives, production from both is expected to be limited in coming years. 

Rabobank expects these supply-side issues could drive higher pricing, as markets compete for supply, but notes potential demand-side issues could circumvent impacts. A slowing economic backdrop could see demand soften, but whether supply or demand-side issues will drive industry pricing in coming years remains to be seen.

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