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What could be worse than a recession? We could be about to find out

David Taylor
Contributing Editor
What could be worse than a recession? David Taylor writes that, we could be about to find out. Source: Getty

As a journo, when you’re doing stories on the economy, you’re obliged to ask professional economists of the risks of a recession – even if the economy’s doing ok.

Why? Well because it’s no good knowing about a recession when you’re in it. 

Business journalists are tasked with informing, analysing and educating the public about business, finance and the economy – warning people of what’s ahead is a vital part of that.

As it stands, the economy’s going OK. Not great, but OK.

The key risk for Australia is related to consumer spending. A combination of low wage growth, high levels of personal debt, and job insecurity means shoppers are less willing to part with their money.

Consumer spending makes up roughly 60 to 70 per cent of economic growth. So, until the consumer relaxes again and starts to spend up, Australia’s economy will continue to rely on strong contributions from both government spending and exports.

What if, though, government spending and exports are derailed for a significant length of time?

In that case, you wouldn’t just get a recession, you’d face an economic downturn which was enormously difficult to escape.

Let’s go a little deeper with this by looking at on-going risks to the economy.

Climate change

Many years ago I spoke privately with a UK meteorologist and asked him to give me the low-down on climate change… along the lines of “just how serious is this?”.

His answer surprised me. He said, “David, the climate’s always changing”.

Of course he’s right, the problem now is that weather events are causing large humanitarian, environmental and financial problems – which are all inter-connected.

Consultancy firm PwC noted recently that, “Nearly two thirds of Australian CEOs now see climate change as a major threat, with concerns increasing year on year over a 10-year period.”

Climate change is already influencing the financial landscape. 

BlackRock’s CEO Larry Fink recently wrote that “climate risk is investment risk,” and vowed to exit investments with “high sustainability-related risk.”

Bottom line? Recent weather and climate events are creating anxiety within government ranks and the business and financial community.

That’s problematic. But why?

Government spending

This time last year the federal government was in the process of “locking in” the first budget surplus in a decade.

Tax receipts were pouring in and the government spend on the NDIS came in below forecasts. The government was agonising close to “making money”.

Then of course the unemployment rate crept up and wage growth failed to lift, leaving that surplus looking a little dodgy.

That’s on the income side.

On the expenses side, following the bushfire crisis, the government’s been forced to release billions of dollars in cash to help the recovery effort.

The outlook is now so uncertain the Treasurer can’t currently publicly state whether there will or won’t be a surplus.

Here’s the thing. In recent years the economy has depended to a degree on government support. However if the government needs to step up over and over again to mop up a natural disaster, its hands become tied, or at least less able to support the economy.

Over time, that leaves a slow growing economy vulnerable, and an economy in recession very much in trouble.

Exports 

The other problem for the economy relates to the export sector.

Make no mistake, exports of coal, iron ore and LNG have helped produce a record run of economic growth.

The export sector is currently facing two threats: 

First, a trade deal between the United States and China could result in Chinese importers buying more agricultural and energy products from the US and less from Australia; and second, research shows the mining of LNG is contributing significantly to Australia’s CO2 emissions, so, you guessed it, demand will depend on how much Australia is pressured into cutting its carbon footprint.

If the export sector succumbs to these threats in a material way, it will damage economic growth. Again, the issue I have with this is that the sector won’t bounce back from these setbacks anytime soon. 

Other risks

There are other economic threats which could also entrench the economy in recession.

Many economists warn the unemployment rate will rise. 

Many fear if the contractions in the retail and construction sectors filter through into other parts of the economy, hundreds or thousands of current jobs losses could turn into hundreds of thousands.

In addition, record breaking share markets are becoming vulnerable to a major correction or crash.

There are also other major risks to financial markets:  a deterioration in global economic growth – perhaps caused by climate change; an escalation in the US China trade war; and conflict in the middle east… to name a few.

Window of opportunity

There’s every chance Australia’s record run of economic growth will continue.

If, however, it’s derailed by any of the points mentioned in this piece, I suspect it will be derailed in the most spectacular of fashions.

What would be worse than going into a recession is going into a recession policy makers find extremely difficult to surface from.

It’s not likely, but it’s a possibility – and that’s enough of a reason to do everything in our power to prevent it from happening.

@DaveTaylorNews

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