Bank of America Economists Says Australia Faces One In Five Chance of Recession

Saul Eslake, the former chief economist at Bank of America, has warned Australia faces a 20% chance of a recession before 2017. We can debate the generosity of his timeframe, but let’s concentrate on the point at hand. The likelihood of a recession is increasing by the minute. Every day the so called ‘recession doomsayers’ gain another credible voice in their corner. Last week, it was accounting firm PwC, which said that one third of Australia is already in recession.

It’s no surprise that trustworthy sources are lining up, predicting an imminent recession. Rising trade deficits; record government and household debts; low wage growth; and poor business spending — those are just some of the ills weighing on the economy.

There’s little in the way of positive news to point to.

As Eslake says, few of us are prepared to consider what a recession would look like. Australian’s have become hardwired to think that things can’t really get that bad. After all, recessions are a vague economic concept to young Australians. No adult under the age of 43 has lived through a recession.

Instead, we’ve had a quarter century of steady growth, which has bred an air of complacency. You can blame that on the mining boom, which has been a poisoned chalice for the nation. It’s given us untold wealth, but it’s made us one dimensional as an economy.

But it’s not just Aussie workers who have become too comfortable with rising standards of living. Politicians and businesses alike are to blame for failing to come up with viable contingency plans. Where is the post-mining blueprint to steer us in the right direction?

Right now, we have no answers for how we’ll achieve respectable, long term growth as national revenues decline.

The government still refuses to make difficult fiscal decisions to raise productivity. But can we expect any more from them? The government, whatever shape it takes, only thinks as far as the next election.

Both sides of government watched as the economy came through the 2008 GFC unscathed. Maybe that gave them a false sense of security.

You’ll remember that China was still seeing double digit growth back then. Mining exports underpinned the success of the entire Aussie economy. And they continued to do so up until last year, before commodity prices tanked.

The government is also partly to blame here for not taking more advantage of the boom. Markets and Money’s Greg Canavan says that we squandered opportunities to save up for a rainy day. How?

Not all of the proceeds from our lucrative trade with China benefitted Australia. Instead, substantial revenues from resource exports were diverted into foreign hands.

Of the earnings that did end up as government tax revenue, the government has made a mess of savings, foolishly believing the boom would last forever. Now, with mining revenues declining, all we have is the RBA’s futile attempt to boost growth by lowering rates.

Lower rates are mostly serving to push up asset prices like those seen in the property market. Still, those in power will point to this illusion of prosperity to disguise the rut we’re in.

We know that RBA’s monetary policy is ineffective because business spending remains poor. I know what you’re about to say, what about May’s 1.9% rise in business spending? We should be careful not to read too much into this. That initial boost was expected, coming on the back of the government’s small business tax break package. We’ll need to see how this fares over the next six months to make any final conclusions.

Granted, the government should be commended for trying to lift business spending. But their measures certainly won’t be enough to offset a projected $100 billion cut in business spending over the next year.

So if the government is serious about making the coming recession as comfortable as it can be, it’ll need to do much more.

Finding new avenues to economic growth

The tax breaks were a start, but the government needs further reforms to make it easier for businesses to increase productivity and lift growth rates.

Mr Eslake thinks the government should focus on boosting growth by increasing efficiency in the markets. He suggests they go about this by removing subsidies and reforming labour-markets. That could prompt businesses to increase investments in areas like infrastructure and education.

The problem is that government doesn’t seem serious about addressing these challenges. Contentious policies, which could bring about more efficiency, have been shelved. These are policies which could bring reforms to taxation, labour-markets, and pension reforms. None of those are likely to see the light of day before the elections late next year.

So what does that tell us about the nation’s ability to avoid a recession? It says that we have little chance of avoiding a recession in the near future. The only questions will be those concerning length and severity.

It’s no exaggeration to say a looming recession is the most pressing issue facing the nation in 25 years. But increasingly it appears as if there’s no real answer to it. At least nothing that won’t be solved without more debt.

Greg Canavan, one of Australia’s leading investment analysts, knows that we can only get by with rising debt levels for so long. He thinks that a recession will arrive much sooner than even Mr Eslake predicts.

In a free report, ‘Australian Recession 2015: Unavoidable’, Greg reveals why economic growth is going to fall sharply over the next three quarters. From household savings ratios to widening trade deficits, Greg will show you why a recession is inescapable, using RBA’s own charts.

But there’s always a silver lining for those who can plan ahead of time. Greg also wants to show how you can safeguard your wealth. He’ll take you through the steps to protect you and your family from the fallout of the recession. To find out how to download his free report right now, click here.

Mat Spasic,
Contributor, Markets and Money

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Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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