There’s been a lot of talk globally, and in Australia, about the possibility of a recession. This is a risk given the ongoing US-China trade war which has become more serious recently and is having economic ramifications in many parts of the world.
Share market implications
Aside from a recession – which is defined as two consecutive quarters of negative economic growth – being serious in its own right, it also plays a significant role in what happens with share markets and the value of many investor’s nest eggs.
If you look historically we often have share market falls but whether there is a recession is very important in determining whether those share market falls are a correction or mild bear market – where the market comes down say five, 10 or 20 per cent but is higher a year later – or whether it turns into a major bear market where share prices come down 20 per cent and a year later the index is down another 20 per cent.
So whether we have a recession in the US, in particular, but also in Australia, is critically important in terms of the depth of any down turn in the share market.
Recession not inevitable
My feeling is we’re probably not going to have a recession.
While the risks have increased – and the trade war is probably the biggest risk of them all and the one to keep an eye on – we have also seen some concerns about inverted yield curves (although they’re not a totally reliable indicator of recessions), but other indicators of a recession simply aren’t present.
We haven’t had the excessive optimism you normally see prior to recessions during boom times – we simply haven’t had a boom. We’ve got very low inflation globally, central banks haven’t had to slam on the brakes, and we haven’t had a huge surge in debt around the world or high levels of cyclical spending on things like housing, investment or consumer durables.
Likewise when you look at Australia, beyond the housing market we don’t have a lot of excess in the economy.
And there are also other parts of the Aussie economy which will help keep us going. Infrastructure spending is doing very well, there’s still solid demand for our exports and business investment, particularly mining investment, seems to be showing signs of turning the corner. All of these things should help offset the downturn in housing construction.
So the bottom line is, yes the risk is there but I think we will avoid a recession in Australia and globally, and therefore any pull back in share markets is more likely to be a correction rather than a major bear market.
Subscribe to SMSF News below to receive my latest articles straight to your inboxDr Shane Oliver, Head of Investment Strategy and Chief Economist
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