Australia suffered its worst GDP decline since the financial crisis in 2008. Economists expected a decline of 0.1% but Third Quarter GDP Declined 0.5%.
Trade data subtracted 0.2 percentage points and construction data released last week were much worse than expected. Business Investment was also weak.
Add to those concerns, a housing bubble that has been ready to pop for years, but hasn’t yet. Is now the time?
Australia last had a recession in 1991. Analysts think recessions can be avoided for something like forever.
Not Even Halfway
Financial review writer Phillip Baker says Australian Economy is Not Half Way to a Recession.
The economy may have gone backwards in the September quarter, but we’re not on the edge of a recession.
Economic expansions like the one Australia has enjoyed for so long don’t just die suddenly. They have to be killed off and at this stage it doesn’t look like that will happen.
An annual growth rate of 2.5 per cent is now much more likely as this year’s annual growth rate will probably come in at 2.3 per cent, again, lower than most economists had predicted at the start of 2016.
Perhaps the biggest worry from this latest report was the drop-off in consumer spending.
After all, it makes up more than half of total demand and is a key to the RBA’s growth forecasts.
Slow wage growth and slowing employment growth are to blame, but we need consumers to dip into their savings more to boost spending growth.
The other major concern was the drop-off in dwelling investments, which implies we can no longer rely on the housing market for growth.
The real issue however is what can be done about it from here?
RBA won’t be helping
The obvious reaction will be to call out for more interest rate cuts from the Reserve Bank, but in reality monetary policy is on its last legs.
To get the economy growing we need consumers to spend more. We need more investing from business and we need more jobs being created.
If there wasn’t so much public debt around there would be more pressure on the federal government to undertake spending on infrastructure.
Phillip Baker’s Alternate Universe
- Consumer spending down
- Housing down
- Employment slowing
- Wages slowing
- Central bank not in position to help
- Australian dollar tanking
- Too much public debt to increase federal spending
- Not even half way to recession
In the face of points 1-7 that Baker acknowledges, he still says “we’re not on the edge of a recession” on expectations consumers will spend more.
Phillip is not alone in his alternate universe. Check this out.
Recession We Won’t Have to Have
Also residing in some sort of Bizzaro World universe, business reporter Stephen Letts for Au News comments on the Recession We Won’t Have to Have.
Had the great Greek philosopher Aristotle been an economic pundit in 2016 he may well have said something pithy like, “One swallow does not a summer make; similarly, one quarter of negative GDP does not make an economy recessionary”.
Why do recessions hit?
There are a few basic reasons why recessions occur according to Market Economics’ Stephen Koukoulas, and none of them point to an impending problem in Australia.
“It can come from a policy error, and we don’t have that,” Mr Koukoulas said.
“It can be a global shock, such as the GFC, but globally things are improving and commodity prices are rising.
“Then there are internal issues, specific to an economy, like banks lending too much, but that isn’t happening either.
“That doesn’t mean a recession won’t happen, there is always a risk, but it doesn’t seem likely.”
CNN Money Chimes In
CNN Money writer Ben Wescott asks Is Australia headed for its first recession in 25 years?
Wescott also cites Stephen Koukoulas, managing director of Sydney-based consultancy Market Economics, who “agreed that Australia’s economy has the resilience to bounce back.”
In the often resorted to tactic of economists, Commonwealth Bank of Australia’s Chief Economist Michael Blythe told CNNMoney that “unusually bad weather had hampered construction, while a close and divisive election in July hurt confidence among consumers and businesses.”
Icing on the Recession Cake
Real Estate AU writer Michelle Hele hits the nail squarely on the head with Credit might be cheap but a fifth of these borrowers struggle to make their mortgage repayments.
MONEY may be cheaper than ever but a fifth of young borrowers still can’t make their mortgage repayments.
And they are more in debt than any other age group by a long shot.
When mortgages, credit cards and personal loans were added up millennials, those aged between 18 and 34, owed an average of $428,000 — a massive $146,000 more than was owed by gen X and Baby Boomers.
The research done for Australian credit bureau, Experian, found many millennials were “extremely concerned’’ about the affect a 1.5 per cent increase in interest rates would have on them.
The study of more than 1500 people found gen X borrowers were also quite concerned.
Major banks moved to lift their fixed interest rates this week and analysts are now predicting potential rate rises for next year.
Experian Australia/NZ managing director Suzanne Steele said first home buyers and millennials were the most in debt generation and most likely to miss repayments on their mortgages.
“22 per cent of Australian millennials had been unable to make a mortgage repayment in the last 12 months, which is twice as many as the overall market average (11 per cent),’’ she said.
Ms Steele said one reason for the high borrowings of millennials could be their desire to meet social expectations while trying to build wealth in a market of rising house prices and low income growth.
With findings such as these, Ms Steele said there was no doubt that a rate rise would make things trickier for those looking to get their foot on the property ladder.
“We may see fewer mortgage applications from young individuals or first home buyers looking at more affordable properties.”
Despite struggles with meeting repayments millennials were keen to get their hands on credit with the generation applying for more than twice as many credit cards, mortgages and personal loans as the average gen X or baby boomer in the past 12 months.
While they may be asking for credit, they weren’t necessarily getting it, with the study finding they were more likely to be knocked back.
To help them cope with their large levels of debt more than half of the millennial mortgage holders surveyed had cut down on buying “essential items”.
More than a third took on additional hours or a second job and a similar number borrowed from friends and family.
About 17 per cent of millennials said they could not maintain their lifestyle without borrowing.
Alternate Universe List Expanded
- Consumer spending down
- Housing down
- Employment slowing
- Wages slowing
- Central bank not in position to help
- Australian dollar tanking
- Too much public debt to increase federal spending
- Half of millennial buyers cutting back buying “essential items”
- One third of millennials borrowing from friends and family
- Mortgage rates rising
- 22% of millennials unable to make mortgage payment, 11% overall unable to make payments
- Not even half way to recession
Lost in Space Roundup
- Financial review writer Phillip Baker says “Australian Economy is Not Half Way to a Recession”
- Market Economics’ Stephen Koukoulas says “recession not likely”
- Australia’s Chief Economist Michael Blythe blames “bad weather” and the election.
- Business reporter Stephen Letts cites Koukoulas
- CNN Money writer Ben Wescott cites Koukoulas
The only person in this article who made any sense was News Corp Australia writer Michelle Hele. Congratulations!
Addendum
Reader Matthew Cleggett at Miletgi Global Investments adds.
Mish, we have had 5 year period of real wage declines. And the other big one is full time permanent jobs are disappearing. I have dozens of customers with kids in their 20’s who can only pick up 12-15 hours per week, they’ve accepted these kids have no timeline on the horizon to leave home.
Consumer confidence? Where’s that going to come from?