Australia runs the risk of talking itself into recession

• When it comes to their investment decisions, Australians are now more risk averse than they were during the GFC.

• Most are choosing to save or pay off debt, rather to invest in riskier assets such as stocks.

• Australian economy slowed sharply in the second half of last year, largely due to weak household spending. The data so far in 2019 suggests that's continued.

• The Commonwealth Bank says Australia runs the risk of talking itself into recession.

• A senior economist at the bank says the government now finds itself in a position where it can deliver a "circuit-breaker" to help lift the gloom.

• Australia's federal budget will be delivered in early April. The federal election will follow a month later.

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Australians, according to recent data, are feeling a little less confident than usual in early 2019.

According to the latest Westpac-MI consumer sentiment survey for March, pessimists currently outnumber optimists in Australia, albeit by a very small margin. The separate ANZ-Roy Morgan consumer confidence index also sits just below average levels.

It's not a surprising outcome given recent economic data, especially at home, but it's hardly dire at this point.

However, while Australians are feeling a little ho-hum right now, when it comes to their investment decisions, they are, collectively, more than a little nervous.

One thing really stood out in the Westpac survey to demonstrate just how fearful Australians are about where to invest.

Here it is. Our emphasis in bold.

Responses to additional questions on the ‘wisest place for savings’ suggest risk aversion has risen further. Over two thirds of consumers now favour safe options such as bank deposits, superannuation or paying down debt. Only 9% favour real estate, a new record low going back to 1974, while only 8% nominate shares. The mix is more risk averse than at the height of the global financial crisis in 2008 and highlights the risk that a move by households to increase savings rates could further undermine consumer demand.

Each quarter, Westpac asks this question.

The responses in the latest survey indicate that Australians are now more risk averse when it comes to their investment decisions -- or scared -- than what they were during the height of the GFC.

That's fairly remarkable given Australia just notched up its 28th year of consecutive economic growth, with unemployment sitting at the lowest level since 2011.

They're shunning things like stocks and housing, choosing instead to hunker down by paying down debt or save for their retirement.

This simple-yet-effective chart from the Commonwealth Bank shows the proportion of survey respondents nominating paying down debt is back to levels seen a decade ago, surpassing the levels seen during the last global growth scare back in early 2016 that was concentrated on China.

Image: Commonwealth Bank

With Australians already heavily indebted compared to most other advanced economies, many would say that paying down debt is a good thing.

It's hard to disagree from a household balance sheet perspective, but if it comes at the expense of the Australian economy, it could end up doing more harm than good, particularly if large swathes of Australians choose to shut their collective wallets and purses all at once.

As Westpac noted, the shift in investment preferences could see household spending slow even further, weakening what is the largest part of the Australian economy. If it slows, the broader economy will almost inevitably slow with it.

Gareth Aird, Senior Economist at the Commonwealth Bank, is another who is concerned, warning that Australia runs the risk of talking itself into a recession.

"This souring mood presents a real risk that the softness in the economic data, coupled with falling house prices, is going to negatively impact the future spending decisions of households and those fears around the economic outlook will materialise," Aird says.

"Normally a falling unemployment rate and slowly rising nominal wages growth would be expected to make households feel better, but clearly the softness in the economic growth has trumped that, in part because the headlines it generated around a per capita recession were pushed by the doom and gloom merchants with gusto."

While many forecasters, and financial markets, expect the RBA will act on this potential threat by delivering a series of interest rate cuts over the year ahead, providing relief, if delivered, for those households servicing debt, Aird says it's the government who should do the heavy lifting for the economy on this occasion.

He wants tax cuts. Now.

"It looks like the Australian consumer needs a circuit breaker. And the sooner the better," he says.

"The household confidence, wealth, income and spending nexus is heading in the wrong direction.

"The Government’s coffers have been boosted solidly and there is now scope -- and need -- to give income tax cuts to households."

Australia's budget position has improved substantially in recent years, helped in part by spending restraint but also stronger than expected employment growth and firmer commodity prices.

There's a strong possibility the government may even deliver an underlying surplus for the first time in a decade when the budget is handed down early next month.

While that goal has been targeted by both of Australia's major political parties over the past decade, policymakers on both sides now appear to have a clear choice: score political points by trying to outdo each other in terms of how large a surplus they will be able to deliver in the years ahead or take action to support the economy at a time when conditions are clearly weakening.

Fiscal restraint is welcome, especially when times are good. Saving for a rainy day and all that.

However, given many now believe the economic storm clouds are building, now appears to be an appropriate time to provide some support. Given the loss of momentum in the economy late last year, and the early indicators this year, it appears that rainy day may be approaching.

Some well-timed and appropriate fiscal stimulus could be just what the economy needs given unemployment already sits at multi-year lows.

But choosing the alternate part of targeting budget surpluses throughout the economic cycle will run the risk of weakening the economy further. Under such a scenario, any surplus that may or may not be delivered will likely prove to be short-lived.