IMF Tells Australia ‘Get Used to Slowing Growth’

The International Monetary Fund (IMF) delivered a sobering outlook for the Aussie economy this morning.

The bank says we should get comfortable living in an era of slowing growth. The IMF points to weak commodity prices and lack of investment outside mining as factors that will continue dragging on GDP. So much so that it could cut annual growth by 1% to 2017.

This verdict comes on the heels of the Reserve Bank’s own downbeat assessment. Not a month ago, RBA governor Glenn Stevens warned growth rates of over 3% were a thing of the past. And that we should readjust our expectations below this.

That Australia is facing weaker growth prospects should come as no surprise. By now you’ll be well aware that GDP growth is falling. In the year to June, the Aussie economy grew at a sluggish 2%. That figure was down from 2.5% over the previous quarter.

In other words, the economy shaved 0.5% in the space of one quarter! Actual GDP growth in Q2 2015 was 0.3%, down from 0.9% in Q1.

It doesn’t take a gambler to see that odds of breaking 2% this year are slim at best.

What does all this mean in the long run?

IMF concluded the economy could shed as much as 5% off GDP growth in the next decade. That’s if economic growth remains closer to 2.5%, not 3%…which is a very likely. The way the economy is tracking, even 2.5% will take some effort.

Here at The Markets and Money, we’ve been foreshadowing the coming decline for years. Greg Canavan, our chief editor, has warned all year that Australia faces a recession in 2015. It seemed irrational in Q1 when growth hit 0.9%.

But it’s looking more probable with every passing day. You can read what Greg has to say about the coming recession by clicking here. Greg’s not alone in his assessment either. Major financial institutions have waded on the debate recently. Goldman Sachs now says there’s a one in three chance of recession in Australia.

Australia: The lucky country?

With or without a recession, economic growth is slowing. But according to the IMF, Australia’s in a better position than most. Yet is that really true?

We know the commodity crunch is hurting resource economies the world over. Falling prices in iron ore, coal and oil have slashed government budgets from Australia to Russia.

But is Australia better placed to fend this over other major exporters? As far as the IMF is concerned, yes. Why? Because the Aussie economy is more diversified, or so it believes. The IMF says we have other pillars supporting the economy even as mining declines.

We’ll touch on whether that’s actually true in a moment. But first, here’s the IMF explaining its conclusion:

Commodity exporting economies are at a difficult juncture. A significant deceleration in growth rates is unavoidable.

Global commodity prices have declined sharply over the past three years, and output growth has slowed considerably among commodity-exporting emerging market and developing economies. Whether the decline in growth has opened up significant economic slack – that is, has increased the quantity of labour and capital that could be employed productively but is instead idle – and the degree to which it has done so are likely to vary considerably across commodity exporters.

The variation depends on the cyclical position of the economy at the start of the commodity boom, the extent to which macroeconomic policies have smoothed or amplified the commodity price cycle, the extent to which structural reforms have bolstered potential growth, and other shocks to economic activity.

Other commodity exporters haven’t been as lucky. Canada, Brazil and Russia are all in recession. Even tiny, oil rich Norway slashed interest rates to 0.75% this week in response to weak oil prices.

But it’s likely that Australia is just lagging behind the rest. In the case of iron ore, our biggest export, prices are down a third since 2011. In the past year alone, prices have fallen by 40%!

As we’ve already seen, GDP growth tanked between Q1 and Q2. Growth would have been even lower without government spending on defence. Now, with both consumer confidence and business spending down, things are meant to improve? Not likely.

Remember, all this is taking place with record low 2% interest rates in Australia. Brazil, which is in recession, has interest rates set at 14.5%. We’re no better off than them really — the RBA merely timed its rate cuts well this year, and we’re seeing the effects of that.

Non mining investment won’t help Australia’s standard of living

These days, central banks cut rates for two reasons. One is to boost export competitiveness on global markets. Rate cuts weaken currencies, making goods cheaper for buyers.

The other is to increase non mining investments. And this is where the big hope lies. Policymakers are optimistic that other sectors of the economy will drive up growth. To be fair, the weaker dollar is helping lift tourism and education. But this isn’t nearly enough.

Non mining investment may be picking up, but it’s not offsetting the decline in mining. We squandered this opportunity to truly diversify when it presented itself years ago.

Yet during the mining boom, most investment still flowed into mining. And why wouldn’t it? Resources were thriving. Short-termism ruled the day. Yet it left us without a plan once the inevitable boom subsided.

Economic growth is now slowing. The IMF and RBA are both telling you to get used to a new normal. One in which standards of living follow GDP growth down the tube. On Monday, we got another clear sign of this.

Guy Brute, an economist at Alliance Bernstein, issued a stark warning with some compelling evidence. He showed how Australia’s net national disposable income per capita has been in decline since 2011.

This measure is a key indicator of prosperity. It adjusts for export and import prices, and changes in population. It also accounts for net income flows not going to Australian residents.

His conclusion lines up with the start of the end for mining. Commodity prices started their slide in 2011. Ever since, we’ve been living on borrowed time. Loose monetary policy did its bit in easing the pressure. Meanwhile, rising asset prices, like property and stocks, gave the illusion of growing wealth.

Yet in the real economy, unemployment rose and wages stagnated to decade lows. But it’s all collapsing in on itself now. A recession is all but guaranteed.

Yet that might be the least of our problems. Worse is the long, drawn out decline that may follow in its wake.

Mat Spasic,

Contributor, Markets and Money

PS: Markets and Money’s Greg Canavan says Australia’s hurtling towards recession this year…the first in 23 years!

Greg is one of Australia’s leading investment analysts. In a free report, ‘Australian Recession 2015: Unavoidable’, Greg reveals how we’ve found ourselves in this position. And he’ll show you the charts that prove the RBA knew this was coming all along.

Yet there is a silver lining in all this for you. You can take actions right now to lessen the blows of the coming recession.

Download your free copy today to learn how to protect your wealth from the coming crash. To find out how to download his free report right now, click here.

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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