April 26, 2024

Productivity Matters – the implications of Australia’s falling productivity on hard asset private credit.


Declining productivity in Australia is impacting the lending environment and outlook. In 2023, productivity output fell by 3.7% (Productivity Commission) despite the number of hours worked increasing by a record 6.9%. A higher productive output allows wages to outpace inflation and stabilise prices, while falling productivity narrows the RBA’s path to achieving its inflation target (2-3%).
Today, we look at the opportunities and challenges that a lower productivity environment creates for private credit.

There has been a lot of conjecture about productivity from different sides of the political spectrum, but the numbers are now in and Australia is tracking the worst performance in the Western world. What does this mean for our strategy?

Our 2024 outlook considered the market-implied view that reserve banks worldwide would aggressively cut rates as a best-case scenario; we have been preparing our portfolios for a more likely higher for longer rate environment by taking more asset protection on new and existing investments (the Merricks Capital Partners Fund has an average weighted LVR (Loan to Value Ratio) of 60%, down from 63% 18 months ago, and 78% of the portfolio on floating rates) . Based on the current level of potential borrower demand for purchasing assets, we expect real estate transaction volumes to bounce back from 2023 extremely low level as purchasers hunt for value in a subdued commercial real estate market where lower productivity will see asset replacement costs continue to rise.

Source: https://www.pc.gov.au/ongoing/productivity-insights/bulletins/bulletin-2024/productivity-bulletin-2024.pdf

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