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.
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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