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Stocks plummet, AUD falls: Is Australia headed for recession?

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Despite a slight recovery on Wednesday, Australian share investors still lost a significant amount of value in the past week.

The stock tumble naturally brings up the question of whether it's the start of something more sinister in the wider economy. The R word.

There were experts who even predicted a recession even before the market plunge this week.

Earlier this year, UNSW Business School senior lecturer Jonathan Reeves warned that property price falls were putting the Australian economy under threat of a recession in 2020-2021.

"The residential building sector and related sectors are a substantial part of the economy. Therefore, every month of further house price declines not only raises the likelihood of a bursting housing bubble – but also that Australia is heading towards recession," he said.

AMP Capital chief economist Shane Oliver told Yahoo Finance that the length and severity of the US-China trade war is a bigger concern for the economy than the short-term share market plunge.

"It is quite normal for share markets to go through corrections every so often," Oliver said.

"It doesn’t necessarily mean Australia’s going to go into recession, but obviously it’s a risk."

With the Australian dollar down nearly 1.5 US cents since the end of July, Westpac chief economist Bill Evans said he didn't expect the trade war to spark a recession in Australia.

"The Australian dollar will perform its normal role as a shock absorber. We are seeing that already," he told News Corp.

A lower Australian dollar helps the country's exports to be more competitive overseas, helping the economy.

Retail ‘recession’

South Africa's Woolworths Holdings, the company that owns David Jones, last week stated that the retail sector in Australia is in "recession", blaming the local conditions for the department store's poor financial results.

"The retail sector in Australia is currently in recession and the Australian economy has slowed to its weakest level since the global financial crisis in 2009," a Woolworths Holdings spokesperson said.

But Amazon Australia boss Rocco Braeuniger disagreed, telling News Corp that he didn't see any such signs.

"No, I’m not seeing that, but on the other hand we are just such an incredibly small part of the ­retail business, anywhere in the world actually, but we are not seeing that."

Interest rate cuts

Both Westpac's Evans and stock expert Brendon Lau of Motley Fool predicted that the Reserve Bank of Australia would cut rates to intervene before a full-blown recession landed.

"There’s growing speculation that the US Federal Reserve will be forced to cut rates to zero again if we suffer a full-blown and protracted trade war, and there’s no way the RBA will not become aggressively dovish under such a scenario," Lau wrote.

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