‘Recession Day’ Approaches for the Aussie Economy

R-Day

We’re approaching ‘D-Day’ for the Aussie economy. Or should that be ‘R-Day’. That is, 28 February. The day when the Australian Bureau of Statistics (ABS) reveals whether the Aussie economy went into recession during the last quarter.

The press tells us not to worry about a recession. They say that everything is fine. In fact, the Weekend Australian Financial Review recently headlined with ‘Don’t Worry, Be Happy’.

What more can we say? The subhead reads, ‘Eight years after the global financial crisis smashed the global economy the signs are beginning to turn’.

The Weekend AFR report continues:

“We’re seeing better economic conditions globally, so much so that for the first time since 2012, we’ve actually revised our global growth forecasts higher”, says Paul Bloxham, HSBC Australia chief economist.

The improved outlook, he says, partly reflects the stronger-than-expected pick-up in European economic activity. But it also reflects an expectation that US President Donald Trump’s economic plans – which include tax cuts, increased infrastructure spending and cuts in regulation – will boost US growth in 2017 and 2018.

We guess the global economy could be turning. We guess the Aussie economy could be turning.

But what if the so-called strong economy is all on the surface? What if, underneath, the economy is stagnating, and is in the worst shape it has been in for years?

For all the grief we give the mainstream media about viewing the Aussie economy through rose-tinted glasses, we should give credit to ABC News:

Australia has ridden 25 years of economic growth without a recession. An amazing stretch of prosperity and a badge of honour that governments of all persuasions have tried to claim as their own.

Much has been written about the importance of the 1980s economic reforms in setting Australia up for this quarter century of expansion. A mining boom of historical proportions was also a massive help.

But often underappreciated is the role that migration has played. A huge increase in migration has fuelled headline GDP growth, keeping Australia technically out of recession. But, it’s also masked a dirty secret, individuals haven’t felt the benefit of this record run.

In fact, since the GFC, Australia has seen per capita income go backwards and it’s only recently recovered…

But more people does not mean that the living standards of the existing population also rise. In fact, it can have detrimental economic effects for the people who are already here.

New workers mean greater competition for jobs, which suppresses wages. The most recent data shows that wages growth in Australia has hit a record low of just 1.9 per cent per annum.

More people also mean more demand for scarce goods and services. When there’s already a tight supply of a particular good, it can mean huge price rises.

Ah, so foreigners coming into the country do push down wages. That’ll be a tough one for the progressives to grapple with. Regardless, of course an increase in labour pushes down wages. It’s supply and demand.

It’s another reason why governments try to push through minimum wage laws, in order to stop wages falling. The consequence, of course, is that minimum wage laws don’t actually help. Minimum wage laws just put a burden on businesses.

Furthermore, minimum wage laws bring forward key business decisions. Those business decisions may involve automation, or even offshoring of jobs — which is ironic. The immigrants come here; the jobs go there. Funny that.

The point is, since last year, when the ABS revealed that the Aussie economy had contracted in the third quarter, the message from the mainstream was that it was a one-off…that the economy will rebound when the fourth quarter number comes out this month.

For instance, in a survey conducted in January, economists predict the Aussie economy will have grown 2.4% in 2016, 2.5% this year, and 2.8% in 2018.

Up, up, up.

Even after 26 years of economic growth, it seems that no-one in the mainstream can believe the Aussie economy can possibly go backwards.

That’s why we believe the market will be taken completely by surprise when the ABS shows a contracting Aussie economy.

And it’s why we’re encouraging Aussie investors to spend some time familiarising themselves with what a recession could mean for you, and how you can prepare for it. You can get your free report here.

Cheers,
Kris


Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Markets and Money e-newsletter in 2005. He is the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service, Markets & Money.


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