Economics & Markets

The odds of Australia going into recession

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

We’re seeing some very poor economic growth numbers in Australia, which is obviously increasing the risk of a recession.

A recession is defined as two consecutive quarters of negative growth. Last week’s gross domestic product figures (GDP) show that the Australian economy grew by 0.5 per cent in the second quarter of 2019. This might appear positive, but growth is below market expectations, with the drag coming from a number of areas.

Factors dragging on the Australian economy

We’ve seen a slowdown in housing construction, which has fed through to consumer spending. In simple terms, fewer new homes means less demand for the things that need to go into those new homes.

We’ve also seen a collapse in housing turnover. When less people are moving houses, there’s also less demand for expenditure on new lounges, televisions, etc.

Further, the ongoing drought and the uncertainty internationally around the outcome of the US-China trade war are also playing a role in the sluggish growth.

All of these things contribute to low economic growth, but a recession is likely going to be avoided, even though the risk of a recession has undoubtedly gone up.

Factors supporting the Australian economy

The first of these factors is the cash rate cuts we have seen come through from the Reserve Bank of Australia (RBA) this year.

We also had tax cuts come through from the Federal Government on July 1. Those could help retail sales in the September quarter, with some retailers expressing optimism that consumers will spend that extra money in their pockets.

In addition, the Australian dollar has fallen in value quite sharply, which will help boost demand for our exports and make our industries more competitive internationally. We have also seen a dramatic improvement in Australia’s external balance, so we have very little reliance on foreign capital compared to the past. This makes us a lot less vulnerable than we used to be.

It’s also worth noting that mining investment, which has been falling for many years, now looks to be finding its low point at the same time that non-mining investment seems to be eking out very modest growth.

Conclusion

Given all of those factors, I think we’ll probably manage to avoid a recession. That said, we’re still going to see pretty constrained economic growth.

That will mean ongoing pressure on the RBA for further interest rates cuts. It will also put pressure on the Federal Government to provide more stimulus for the economy to make sure we don’t tip over into recession and to get growth back onto a better track.

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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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