Celebrating and Decrying Australia’s Recession-Free Run

16 August 2009. A gunshot reverberates around Berlin’s hallowed Olympic Stadium. The sprinters, having taken their mark, leap from the ground.

Moments later, Jamaica’s Usain Bolt crosses the line in first place. Yet the victory is little more than a sideshow. Bolt has just accomplished what no other man in history has achieved. He’s run 100-metres in 9.58 seconds, a record that stands to this day.

More than any victory or gold medal, it’s the records that we all remember. The incredible feats of strength, speed and skill that elevate man’s accomplishments to new levels. Yet not all records are created equal. Luck plays an important role.

Nowhere is this better illustrated than in Australia’s 26-year recession-free run. More Stephen Bradbury than Usain Bolt, the Aussie economy has had to rely on a string of lucky breaks.

When the global economy expanded in the early to mid-2000s, Australia rode the commodities boom. As the world plunged into recession from 2007–09, we kept riding the wave as others fell by the wayside. Both times, China was the common thread underpinning Australia’s resilience.

But with China and commodities sputtering, our risk of slipping into recession has never been greater. At least that’s how it appears, anyway. Though it may seem that day is fast approaching, as one controversial economist says, we could be waiting for much longer than you think.

Either way, the Aussie economy deserves a big round of applause. Prior to this week, the Netherlands held the record for consecutive quarters without recession. That record fell on Wednesday, with Australia reaching 103 quarters. That equates to 25.75 years. Or an entire generation that doesn’t know what a recession looks like.

It’s an impressive record.

So impressive, in fact, that we can’t even put it down to dodgy accounting. In the past decade, we’ve only had three quarters of declining economic activity. That’s three out of 40. More impressively, there have only been four quarters in which GDP declined since the last recession in 1991. That’s four out of 103. It’s an astonishing achievement. With this kind of track record, it’s no surprise Australia has the 19th largest economy in the world. Despite having a population of only 24 million.

And yet we still speak of recessions in hushed tones, as if they signal a coming of the end times. Why is that?

We think it’s down to a lack of understanding.

This is especially true in the case of the millions of Australians who’ve never lived through a recession, your editor included. We’ve become afraid because we only ever hear about the negative effects. About people being scared to spend. About rising unemployment. About the stock and property markets crashing.

That’s why policymakers spend so much time cajoling consumer confidence. And why number crunchers slave away at dressing up economic data.

Many still think of economic success in terms of productivity gains. But the game has changed. Bereft of real gains, policymakers are in the business of making people feel wealthier. Only problem is, this can only be done by inflating debt. But the paradox is that making people feel wealthier brings us ever closer to making them materially poorer.

That’s what debt does in the long term. It lays the groundwork for recession, or worse.

What we hear less about are the positive effects that recessions can have. We rarely hear that they are a natural and necessary part of economic lifecycles. That they help remove excesses built up in the economy. That they put a break on inflation. And that they promote shifts in societal attitudes towards money in general.

The word ‘recess’ means to retreat…to take a break…to enjoy some respite. And that’s exactly what the economy needs once in a while — a holiday from growth. But, by the looks of it, Australia has yet to book its flight.

Growth is very much still on the agenda. At 103 quarters without recession, who’s to say 150 quarters isn’t achievable? In fact, the evidence suggests that it might very well be. Household debt to disposable income is as at 189%. That’s dangerously high. But the ratio of housing assets to disposable income is at 910%. What does this mean? Quite simply that, as long as the housing bubble continues to purr along, a recession isn’t likely.

At some point in the future, the east coast housing market will slide. And it will, in all likelihood, bring on a recession. But, as you’ll see here, we could be waiting for a very, very long time.

What happens after that? Well, Australia’s record run will start to look a lot like Lance Armstrong’s… Tarnished, and achieved only through financial doping. Until then, enjoy the show.

This week in Markets & Money

This week, the Reserve Bank of Australia kept rates on hold at 1.5%. But, as Shae noted on Tuesday, it’s facing a big problem in the form of the US Federal Reserve.

The RBA has two options looking ahead. It can either cut rates this year. Or it can sit back and hope the Fed does the dirty work for them. Shae says the Fed is likely to raise rates another two times this year. Two 0.25% increases would bring US interest rates at parity with Australia’s. Were that to happen, we’d lose our yield advantage over the US, weakening the Aussie dollar. That could send the AUD back below 70 US cents.

One way or another, Shae says the RBA may have little choice but to ride out the Fed’s moves. You’ll find her full analysis in Tuesday’s M&M here.

On Wednesday, Shae switched her attention from central to commercial banks — specifically, to the Teachers Mutual Bank (TMB). Last week the bank made sudden changes to its home lending policy. The TMB will now only allow a 50% principal and interest setup for all home loans. On top of this, it’s jacking up prices on its interest-only loans by 0.4%.

In Shae’s view, the TMB needs to build a buffer between debt on their books and customers’ cash on deposits. And they need to do it quickly. Otherwise, as Shae suggests, the bank faces serious trouble ahead. How serious? Read Wednesday’s M&M to find out, which you can do so by clicking here.

On Thursday, real estate guru Phil Anderson hit back at the recent alarmism over the property market. As you may know, Phil believes markets are governed by what he calls the Grand Cycle. (You can learn more about this Cycle here).

This week, some analysts suggested the bubble is close to popping. According to Phil, they’re ignoring the evidence that suggests anything but a crash. In Thursday’s M&M, Phil outlined four reasons why he believes the property market is likely to keep going higher. You’ll find them here.

As you’ll know, here at Markets & Money, we’re a mixed bag of opinions. Unlike Phil, we’re not all bullish on the economy. Least of all Vern Gowdie.

This week, Vern again looked at the latest effects of our reliance on debt. As he noted, he believes we have, at best, five years before we come up against a brick wall of reality. What we could call the ‘mother of all crashes’.

His advice on surviving and thriving as we head into this environment is as timely as ever:

Take responsibility for your financial welfare. Learn new skills. Prepare to work longer. Pay down debt as quickly as possible. Save more. Expect a reduction in future government contributions. Act contrary to the crowd. And adopt a more conservative investment profile.

To find out why Vern believes this crash is creeping ever closer, you can read Monday’s M&M missive here and Friday’s piece here.

That’s all for this week.

Until next time,

Mat Spasic,
For Markets & Money

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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