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?
Mike “Mish” Shedlock
So, it smells like crap, it looks like craps, it feels like crap, but it isn’t crap because it gets called ‘digested food’.
Did I get that right?
Ya forgot da taste test.
Economists and journalists have predicted 0 of the last (fill in a number) recessions and depressions…All is well!
It’s not us, it’s everybody else.
http://pds2.egloos.com/pds/1/200608/30/46/c0022246_18341475.jpg
Being an Australian I can confirm that the continent is wrapped squarely in the thick cotton wool of denial thanks to one sided leftist, union-lobbying, state-supplemented TV or alternative Murdoch/Packer owned commercial media programming. The one-sided establishment rhetoric has no real competition.
The resulting puppy dogs and fairy floss welfare bliss also comes free with every zero interest car-loan, credit card balance transfer or 5 minute over-the-phone personal loan which the masses rely on more and more to make their debt and utility payments.
So naturally the media are claiming: “What recession?” Even though Australia has crazy housing bubbles, the highest private debt to GDP of any developed nation and the same declines in *full* time employment opportunities being experienced everywhere else in the world.
There is a reason Australia is called “down under”.
Well this is what America has to look forward to in the next few years. But, we are the largest domino and Americans are completely ignorant as to what is coming, so our fall will no doubt be the ugliest. It’s almost like this is the final act of the debt based world economic system. Alan Greenspan, love him or hate him, has said the world cannot return to “gold standard” because of the entitlement programs everywhere in the world. And, if a country decides to enact austerity programs, the GDP noise dives. Enjoy it everyone while it lasts…lol.
Soooo, what has Australia been doing right that it has not had a recession in 25 years? The Great Recession did not affect them. How can a country that is so small (22 million) keep its economy growing with a higher GDP than the US? Let’s see, no tipping since all have a minimum wage of $15, National Health Care, etc. Australia is one of the best places to live in the world. Surely their approach has worked much better than the US model of Vulture Capitalism. Besides, Australia is on sale – go visit.
The eighties and early nineties saw a period of dramatic economic reforms.
The US model of Vulture Capitalism was replaced by Central Bank control and maximum over regulation by Big Government over 100 years ago. You don’t seem to know much about the US, Paul.
Australia did “well” in the last 25 years because it was the primary resource of commodities for China.
In other words, it was a third world country.
Yup.
Large Country. Small population. Lots of natural resources per capita. Some Gulf States, Canada and Norway have done well following the same formula. It’s kind of hard to replicate for higher population countries without accepting some rather draconian measures, though……
Technically speaking, for the longest time, what determined living standards, were how much “human capital”, and “institutional capital” a country’s population was in possession of. With the entry of billions of (primarily) Asians into the “world economy”, there was a quick burst in inflation wrt human capital, lowering it’s valuation relative to natural resources. So, countries with disproportionate per capita access to natural resources, did really well.
They’re heydays will likely resume again, as more and more people acquire more and more human capital. Yet growth in accessible natural resources, are much slower. But even all the resources in the world, don’t do the average Aussie much good, if he is so stupid he falls for the coquetry of scams that add up to nothing more than transferring whatever he may make and own, to a small gaggle of banksters and other connecteds; under pretense of some harebrained “economic” “theory”
In the eighties and early nineties we had dramatic economic reforms.
Australia got lucky. We never had the dot.com bubble and then we had 15 years of China buying ever more of our minerals and produce as well as massive Chinese property investment. Now if China cuts back on resource imports or cuts back on property investment then we will be in deep debt with massive job losses. I work on a 5 billion dollar construction site in Sydney. The main construction finishes next week (on the biggest building in Australia) and then I’m looking to find a new job.
Looks like Canada will be following in Australia’s foot steps.
The only way out of an insane amount of private debt seems to be….. More debt !
Seems like a great time to lower the interest rate to -2 % that will get the debt slaves spending.
It’s a low growth world these days. A cyclone in Qld was enough to put us in a negative quarter in 2011 and we’ve been close to a technical recession before.
http://www.smh.com.au/comment/australias-national-accounts-recession-were-not-even-close-20161207-gt5zih.html
It’s uneven across the nation. If you live in Sydney or Melbourne things seem pretty good. Elsewhere it’s not so hot. There seems to be plenty of spending in the two main cities, at least superficially. It’s surprising really that the housing bubble is still swelling and little sign of a correction. We’ve managed to diversify away from extractive industries without too much pain. It still seems to be the “lucky country” even if run by second rate politicians. They really are a poor lot, no exceptions.
“We’ve managed to diversify away from extractive industries without too much pain.” Lol
Diversify into what, exactly? House-flipping? That’s pretty much the Aussie economy in a nutshell — a nation of property obsessed speculators. Manufacturing represents around 5% of total GDP … the lowest % of any OECD country by a mile. Something to be proud of and take comfort in, no doubt.
Other than Housing and Mining the only other major component of the economy to speak of is the Finance & Insurance sector whose fortunes are firmly entwined in those of the housing sector. Where Housing goes, so does F&I. If Australia suffers a major correction in real estate values, the economy will be obliterated (no exaggeration). As David Murray the former CEO of the CBA (Commonwealth Bank of Australia) recently said in an interview: the Aussie housing market is akin to the Dutch tulip bulb mania. He should know — he oversaw a massive build-up in Resi mortgages at that bank.
Exaggerate all you like. It’s free! The type of economy you talk about is what every western economy is doing today. The earlier models of the economy were based on production of assets and wealth. Today it’s all asset revaluation in our speculation economy. We only produce wealth for the extreme top end of society, because the housing boom is taking nearly all our savings and giving them to the banksters, denizens of the 0.1%. Nothing unique to Australia here.
Too right!… but Australia has lots of free (so far) sunshine – no one seems to want to make that into an industry, maybe because just about everything that makes money is foreign owned, not-taxpaying and not invested in Australians.
The free lunch from selling our assets will end one day but probably not yet – look at the map above and come and come get it 🙂 It’s full of great low cost assets free of export restrictions.
Our politicians will assist for a annual inflation adjusted post parliamentary consultancy fee.
Pretty weak analysis of the Australian economy. The main reason why growth is expected to lift in the next quarter is the strong growth in commodity prices which wasn’t reflected in the last quarter and will lift GDP substantially. Sure there are risk such sharp deflation in house prices but with rich Chinese flooding into Australian real estate who can say when that will happen. Could be tomorrow. Could be in five years time.
Well – we will see
Ho many people involved in exporting commodities
How much did exports go up?
“…rich Chinese flooding into Australian real estate …”
Another tired old fallacy. China is nowhere near as wealthy as the media and the people they claim to serve like to believe. There are very few genuine cash-rich Chinese around and those that are, are not buying Sydney apartments. The Chinese that are buying these apartments are putting deposits down that they accumulated from multiple family members plus friends in the hope of then getting finance in Aus and making a turn in future years. Aussie banks are now clamping down on this practice as incidences of fraud are legion.
Those Chinese that are ‘paying cash’ are acquiring the cash through similar means, along with borrowing heavily in their domestic markets. Those parking cash outside China as a form of ‘savings’ are also mostly levered to the eyeballs.
If things get rough in RE sometime down the track you can bet your house on the Chinese stampeding out of Aussie real estate. They don’t mess around when the trend turns. I say this as someone who has had plenty of 1st hand experience with Chinese ‘investors’.
“Why do recessions hit?”
Because every up phase of a cycle, also has a down phase.
100% of booms end in a bust.
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.”
Even North Korea has the resilience to bounce back.