Is the Aussie Economy Faking It?

You may have noticed that things have been pretty good lately. The economy is booming. Unemployment is down. And market sentiment is, generally, pretty cheerful.

Overall, for the last few decades, Australia has truly been a place of sunshine and financial optimism.

The economic growth figures released on Wednesday came as no surprise to anyone. Our reputation as ‘the lucky country’ lives on.

The figures show that the Australian economy has had 27 years of recession-free growth. Not only that, but the results from this quarter mark the strongest annual expansion for nearly two years.

We’ve had our GDP grow 1.0 percent, our dollar has risen a quarter of a US cent, our economic growth rate is 3.1 percent, one million jobs have been created since 2016, and we are now first place in the G7 economic leader board.

By all accounts, we’re the envy of the world.

This unexpected and unprecedented growth is mainly thanks to expansion in investment and exports. Particularly the export and production of mining commodities like coal, natural gas and iron ore.

But before we bust out the champagne and orchestral jazz band in a Gatsby-esque national celebration, there’s a few disclaimers to consider about this, seemingly, never-ending growth.

A recession on the horizon?

Although business and government spending have been propping up the economy, the level of household consumption and debt remains a pressing concern.

The report released on Wednesday confirmed that consumers are gradually spending less at the shops. And although our GDP has grown 1.0 percent, only 0.18 of that came from consumer spending.

Considering that 60 percent of the nation’s economic output comes from consumers, this is far from a positive sign.

This drop in consumption is likely due to the fact that Australian consumers are grappling with a mountain of household debt at a time when wage growth is at a record low.

The Australian Bureau of Statistics (ABS) along with the Reserve Bank of Australia (RBA), have found that Australians now have some of the highest levels of household debt in the world. Currently, the household debt to disposable income ratio is sitting at 199.7 percent — with most of the debt being tied up in home mortgages.

Along with many other notable economists, Capital Economic’s chief economist, Paul Dale, was concerned that this lack of consumer spending would continue:

We fear that still-subdued real income growth and the weakening housing market will mean a lot of the softness in consumption lingers.

The weakening housing market is already apparent with the falling property prices in major cities like Melbourne and Sydney. Combined with the threat of rising interest rates, things could stand to get a lot worse.

Leading economists like Stephen Walters, a member of the Australian Institute of Company Directors (AICD), are also warning that the economy could be in for a tumble.

I think the overall message is that households need to brace themselves over the next five years at least that interest rates will be going up.’

Walters also cautioned that Australians shouldn’t be expecting any big pay rises over the next few years. He was confident that with our level of debt, low consumer spending, stagnant wage growth and the threat of rising interest rates, we should be preparing for a crisis sooner rather than later.

Australia will have a recession at some point. I think it’s probably at least two years away.’

This crisis could leave millions of Australians stranded. Especially considering that for the first time in history, less than half of all working Australians currently have a permanent full time job. Not only does this dampen the prospect of wage rises, but in the event of a crisis, it could leave the majority of workers without a sense of income security. 

With all of these warnings, it may be said that the success we have enjoyed for so long is merely a mirage. A fantastical data-driven illusion that you shouldn’t be lured into a false sense of security by.

So instead of preparing for a party, you might want to bunker down and consider how to diversify your investment portfolio. Rather than have the crisis catch you off-guard, it’s much better to prepare for the worst.

If you’re looking to avoid the traditional stock market pitfalls, the cryptocurrency market might be for you. It is perhaps the only market in the world that will retain its potential for monumental gains while the rest of the economy crashes and burns. To learn how you can protect yourself by taking advantage of the wealth of opportunities in crypto, click here.

This week in Markets & Money:

With the recent talks held between China and the US having fallen flat on their face, a trade war might be on the horizon. Tension has been rising for some time since Donald Trump announced he wanted to put 25% tariffs on US$50 billion worth of Chinese goods. And it rose even further after Trump stated he wanted to do the same thing to Mexico and Canada. But as Selva wrote on Monday, if a trade war occurs, geopolitical tension will be the least of our worries…

To read the full story, click here.

The markets are always dealing with various political crises. This year we’ve had to be concerned about Greece, China, Italy and then Brexit. But as Terence wrote on Wednesday, crises don’t matter much in the market cycle. If you look beyond the news headlines of the moment, you’ll be able to predict market moves before they even happen.

To learn more, click here.

Then on Wednesday, Selva delved into the topic of economic crises. Specifically the fact that the younger generation in Australia has had the privilege of never living through one. But with everyone seeming to own the latest phone and luxury car, despite low wage growth, Gen X could be in for a shock.

To read the full story, click here.

The Chinese yuan is well and truly making headway in the global financial system, particularly as a foreign reserve currency. Although the US Dollar has remained unchallenged for some time now, the decision by 14 African nations, the European Central bank, Germany and Spain to include the yuan as a foreign reserve marks a new era. One that could see China play a newfound leadership role in the world’s economies.

To learn more, click here.

Since 1970 there has been 147 banking crises. Looking at that number, it’s no wonder that people have a hard time trusting the banks. As Selva wrote on Friday, this scepticism is warranted. And it may be time for a revolution in our financial system…

To read the full story, click here.

Until next week,

Katie Johnson,
Editor, Markets & Money

Katherine Johnson, usually going by just ‘Katie’, is a member of Port Phillip Publishing’s editorial team, as well as the Editor of the Saturday edition of Markets & Money. Katie works with all of your editors to maintain the quality of their research and analysis. In her Saturday Markets & Money articles she specialises in cryptocurrency and technology stories, and brings you a recap of the week from your other Markets and Money editors.

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