Yahoo Finance Australia is NOT heading for recession: Here are 9 reasons why
Australia’s economy isn’t looking too hot right now.
Businesses are hiring less compared to last year, wage growth is sluggish, the rate of mortgage arrears are reaching GFC levels, and most recently, the RBA slashed interest rates in order to prop up the flailing housing market and boost consumer spending.
It’s no wonder that there has been speculation of whether a recession is on the cards for Australia, after a 28-year dream run.
But the gloom around the Australian economy has “gone over the top lately”, argues AMP Capital chief economist Shane Oliver.
“Despite all this doom and gloom is the share market at an 11-year high, up 16 per cent year to date and just 4 per cent shy of its 2007 resources-boom high. There must be some positives around,” he said.
“So, to inject some balance into the debate around Australia here is a list of positives. They are partly why we don’t see Australia as being about to plunge into recession.”
Here are nine reasons why you should set those recession fears aside, according to Oliver:
1. Australia’s current accounts deficit has collapsed
“The current account deficit is the gap between what we spend as a nation and what we earn – so its near disappearance means we are less dependent on foreign capital,” said Oliver.
This is significant, because a scare in 1980s was that the large current account deficit at the time alongside rising foreign debt could lead to a crisis and an economic collapse.
2. The Aussie dollar is helping to stabilise the economy
“The AUD is down 38 per cent from its 2011 high and is likely to fall further,” the chief economist said.
This acts as a “shock absorber” for the Aussie economy, since a lower AUD makes Australian businesses more internationally competitive.
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3. The drag from the end of the mining investment boom is over
As mining investment fell back to normal levels, it was putting a major brake on growth – but that drag looks to be behind us now.
“Mining investment plans look to be moving up again.”
4. There’s scope for extra fiscal stimulus
Compared to the US, Europe and Japan, our public finances are in rather good shape, Oliver pointed out. The Morrison government’s proposed tax cuts will also afford some relief and fiscal stimulus.
“While the Government is focussed on achieving a surplus it seems to be recognising the case to do more to help the economy with talk of bringing forward infrastructure spending,” he said.
5. Infrastructure spending is booming
Growth in capital expenditure might peak this year, but NSW has flagged another round of asset sales in order to fund new infrastructure.
There’s also talk about bringing back former treasurer Joe Hockey’s asset recycling program, which incentivises states to sell existing assets to put the funding into new infrastructure spending.
6. There’s been no property ‘crash’
While property prices across the nation has been plummeting, there’s “no sign of a ‘crash’”, Oliver pointed out.
“There has been no significant panic selling. The switch for many from interest only loans to principal and interest has not seen mass defaults or mass selling,” he said.
On top of that, the re-election of the Coalition – and therefore the removal of the threat to abolish negative gearing and capital gains tax, along with the RBA’s recent rate cut – has seen a resurgence in buyer interest.
7. The political environment is ‘sensible’
The influence of populism is “relatively minor” in Australia, the top economist pointed out.
“Maybe it’s the moderate climate, maybe it’s the lack of extreme inequality, maybe it’s the compulsory voting system that keeps motivated extremists in their place in favour of a sensible centre,” he said.
“Whatever it is – economic policy making in Australia could always be better (economists would love to see a greater focus on economic reform) but it’s generally pretty sensible.”
8. Population growth is strong
According to Oliver, Australia’s population growth isn’t a world beater, but it’s at the upper end of comparable countries and about double the OECD average, that of the US and the UK, and is faster than India.
It’s not without its issues, with concerns about integration, congestion and pressure on housing and infrastructure and living standards that need to be addressed.
But solid population growth has its benefits of supporting demand growth in the economy and keeping the economy dynamic.
“It also means that while Australia’s population is ageing, the problem is far less challenging than in most advanced countries as by comparison Australia with a median age of 37 is relatively young and it has a relatively low old age dependency ratio.”
9. The RBA can do more
The cash rate is now at a record low of 1.25 per cent, but the RBA could cut again and also has the option of quantitative easing (QE) if it’s needed.
QE would involve boosting the economy by injecting more cash into it using printed money. One way QE could be used is by using printed money to finance fiscal stimulus.
“It could involve either government spending on things like infrastructure (which both adds to demand and the economy’s productive potential) or tax cuts or ‘cheques in the mail’ with use by dates,” Oliver explained.
But Australia is “a long way” from needing to do this.
“We are not in recession so it’s really a debate about what can be done ahead of time which is actually healthy. Better this than wait for a crisis to hit then scramble on what to do.”
What does this all mean?
Yes, Australian growth might be “going through a rough patch” and it could go on for a while yet.
But there’s also a number of good things the Australian economy has got going for it, with lots of scope for more monetary and fiscal stimulus, Oliver noted.
“So – barring a significant global downturn threatening our export earnings big time – recession is unlikely, and it would be wrong to get too gloomy on Australia.”
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