Economics & Markets

A recession isn’t imminent in Australia, but the outlook is sluggish

By Dr Shane Oliver
Head of Investment Strategy and Economics and Chief Economist, AMP Capital Sydney, Australia

In recent months we’ve seen some generally soft Australian economic data. Clearly the economy is not at its strongest, but it’s also not in imminent danger of a recession.

While it looks like the pace of economic growth may have picked up a little bit from where it was in the second half of last year, the overall annual rate of growth is still very weak.

Local and global factors

One of the key factors dragging on Australian economic growth is the downturn in housing construction. We’ve seen some very weak housing construction-related numbers, for example, around building approvals. That obviously impacts employment in construction-related areas as well as retail spending in housing-related categories, such as furniture and appliances.

At the same time, we’re seeing ongoing uncertainty in the global environment, with the US-China trade war and Brexit still dragging on. This is weighing on business sentiment and business confidence.

On top of all of that, in recent months we’ve seen something of a rising trend in unemployment, from the lows of earlier this year to 5.3 per cent in August. Also, the underutilisation rate – which is a combination of both the unemployment and underemployment rates – is heading back up again to around the 14 per cent level.

None of that is helping the Australian economy. It’s putting a lid on wages growth and keeping inflation way below target. Obviously these are all key factors that the Reserve Bank of Australia considers when contemplating interest rate changes.

How bad is it?

So does all of this bad news mean we’re headed for a recession? While the risks have increased, I continue to think that the odds are that we won’t see a recession, because infrastructure spending is booming, the threat of crashing property prices has receded, the low Australian dollar is helping the economy, mining investment looks like it’s starting to rise again and there is still plenty of scope for monetary and fiscal stimulus.

While business surveys are weak, they’re not collapsing. In fact, in the month of September, some of them posted a bit of a rise.

I think a recession is unlikely, but this period of slow, constrained growth will probably be with us for some time yet. Normally, that would be a brake on profit growth. While it probably will be, the offset for share markets – and for investors generally – is that interest rates are also low meaning which is serving to counteract the impact of slow profit growth.

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Shane Oliver, Head of Investment Strategy & Economic and Chief Economist
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While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

 

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