I must confess, when I see an article or a column warning of impending doom in the markets, or that some economic disaster is just around the corner, I think ‘oh brother, here we go again, another doomsayer’.
My instinct is that whatever is in the article is over-blown or overstated and that the writer is just looking for clicks – you might call it click-bait!
All that being said, it strikes me as very odd, that several, that’s right, several leading Australian economists and market watchers are now on the record warning about the possibility that Australia could be heading for a recession, or a financial crisis of some description.
Find that hard to believe? Well here they are: Shane Oliver (AMP); Stephen Walters (AICD); Satyajit Das (former investment banker and author); Paul Dales (Capital Economics); and Katrina King (QIC).
The Reader’s Digest version is that, among them, they believe the current economic climate is as good as it’s going to get, that Europe debt has the potential to produce a global financial contagion; that Australia is at risk of recession in the next 5 years, and that the banking royal commission could bring about a domestic credit crunch.
I can’t just leave that hanging, so here’s more:
The latest snapshot of the Australian economy – known among the pointy heads as “gross domestic product” or GDP, points to a very healthy economy indeed.
The nation’s pumping out all manner of exports from iron ore, to coal, as well as tourism and education.
Let’s not forget the million plus jobs created since the Coalition formed government too.
So why on earth would there be any mention of a recession?
Well the unfortunate reality is that the Australian consumer makes up well over half of the nation’s economic “output”. So the consumer needs to be happy and cashed-up if strong economic growth is to look anything like “sustainable”.
The consumer, however, is not happy.
High levels of household debt, combined with low wage growth and the rising cost of living – not to mention the ever-increasing amount of insecure work, has led to some misery out there.
Economists like Stephen Walters argue that unless the consumer comes to the party, economic growth could falter in coming years as export dollars and government spending dry up.
Now no one wants to be up to their eye-balls in debt during a recession, so Mr Walters’ advice? Brace yourself. Literally, that’s what he told me, “brace yourself”. Cut back on unnecessary spending, re-think the holiday to Europe, and bring down your debt.
He’s basically saying there’s no need to panic, but just make sure you’re not caught swimming naked when the tide goes out.
So that’s the economy.
There are an entirely separate group of worry-warts out there that are concerned Australia might succumb to what Paul Dales describes as a “mini domestic financial crisis”.
His logic is pretty straight forward: the Banking Royal Commission could lead to further credit tightening by the banks, which could then lead to a steeper fall in house prices, which would then hurt the banks, leading to a further tightening in lending standards, and so on and so forth.
He describes it as a kind of “vicious circle”
“That means that some households lose their jobs, they can’t pay their mortgages, which weakens the banking sector, which prompts the banks to tighten lending conditions, which kick-starts the circle again,” Mr Dales says.
Paul Dales has his critics. Both the chief economist of the Commonwealth Bank, Michael Blythe, and the chief executive of the Australian Industry Group, Innes Willox, reckon he hasn’t done his sums correctly.
He stands by his reasoning though.
Global financial panic
Then there’s the broader global context.
There are still several potential global economic flashpoints. They include southern Europe, emerging markets, and China. All have the potential to spark debt crises, as well as runs on banks and currencies.
As QIC’s head of research Katrina King puts it, there’s potential for a financial contagion.
Indeed a trade war between the United States and China, or even between America and Canada, would be enough to ruffle market feathers right across the globe.
Watch the market
So where does all of this leave us? I mean seriously!
I’m what you might call a “markets economist”. I began my career in the markets, and much of my thinking revolves around markets. I also love news. Did you know that once upon a time the financial markets were the very first to receive the news? Traders’ access to Reuters and aap (news wires) meant the next best thing to speaking to a journo, was to speak to a trader.
Anyway, what I’m getting at is that there’s no better place to get the sense of what’s going on that to look to the markets.
If you look at the value of Australia’s major banking stocks since 2015, for example, you’ll notice they’ve plunged between 35 and 45 per cent. That’s telling you a lot of confidence has come out of the banking sector – especially around its potential to generate wealth.
I’m not a betting man, but if the banks don’t find a more solid platform in the market soon, I suspect some of these – what some might call ‘extreme’ economist views, might actually be taken more seriously.
Where does that leave you? Well, for me, I’d certainly rather know there’s a bumpy road ahead, and strap in, than be caught out, and thrown about.