Australia could face recession: economist

Australia's economy is the envy of the developed world but there is a question lurking at the back of economists' heads: when will the good times end?

One prominent economist warns we could be in recession within two years once investment in the resources sector - the great driver of the economy for much of the past decade - drops off.

While resources investment is set to peak later this year, Bank of America Merrill Lynch Australia chief economist Saul Eslake says the real danger period comes when seven major gas projects currently under construction are completed in 2015.

While there are another 20 gas projects currently under consideration, Mr Eslake says their prospects are looking increasingly dim in the current environment.

So if investment in other parts of the economy, including housing, business and public infrastructure, hasn't picked up by that time, a recession could be on the cards.

"There is a risk we could have a recession at that time if the fall in investment isn't matched by something else," he said.

Meanwhile Dr Robert Gay, a former senior economist with the US Federal Reserve now working in the private sector with Fenwick Advisors, says Australia faces the prospect of a "perfect storm" of economic dangers in the not-too-distant future.

He warns a fall in commodity prices could be the catalyst for a particularly unpleasant economic downturn.

First of all, it would make some resources projects - like gold or iron ore mines - economically unviable, which would cause a rise in unemployment and a drag on the economy.

The Reserve Bank of Australia would then be forced to cut interest rates, which would be good for some, but could cause investors to abandon the Australian dollar, causing it to fall sharply.

"There are a lot of people that don't intend on sticking around if the cash rate falls to one per cent," he said.

"They are the potential trigger for the perfect storm."

While a lower dollar would be good for many industries, it could pose a risk to Australia's banks, who source most of their funding from overseas.

Quite simply, a sharp fall in the dollar would make the repayments banks have to make much more expensive, which could have flow-on effects for the rest of the economy.

He says Australian banks may not be properly prepared for an event like that and says the Reserve Bank of Australia should consider establishing a "contingency fund" using banks' capital to guard against such an outcome.

"It would be a rainy day fund for a particular purpose and that is a sudden change in the currency that leaves them exposed to a hit to their earnings and their ability to pay in (US) dollars," he said.

But Mr Eslake, who was previously chief economist of ANZ, believes Australian banks are properly hedged for a sharp fall in the exchange rate.

"My general observation is that the overseas currency exposures that the banks have are almost totally hedged or swapped," he said.

"Also, Australia does have a lot of foreign debt relative to the size of the economy, but the difference between us and most other countries is that most of our debts are denominated in Australian dollars."

Market Data

  • Currencies
    Currencies
    NamePriceChange% Chg
    0.9272+0.001+0.10%
    AUDUSD=X
    0.5516+0.0003+0.06%
    AUDGBP=X
    0.6700+0.0004+0.05%
    AUDEUR=X
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