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Why Australia is not recession-bound

Australia is not heading for a recession.

There are none of the usual recession ‘red flags’ on the economy at the moment but this has not stopped some attention seeking analysts trying to grab some media coverage with outrageous forecasts that a recession is just around the corner.

Most importantly, the world economy is growing at a decent pace.

Not strong, to be sure, but in 2016 global real GDP will rise by somewhere between 3 and 3.5 per cent.

This is sufficient to drive Australia’s export sector, instill some much needed business confidence and it is the most important anti-recession influence.

It is vital to emphasise that there is a huge difference between a recession and weak GDP growth.

Australia’s economy is weak, with the latest data showing real GDP rising by 2.0 per cent and the unemployment rate at 6.2 per cent.

Also read: Economy likely to overcome global turmoil

Both of these results are disappointing, but the good news is that the Reserve Bank of Australia has set interest rates at record lows and the Australian dollar has fallen to around 70 US cents.

Low interest rates and a weak Aussie dollar are significant policy insurance against further economic weakness.

While the local economy is not strong, the run of data over the past month have been pointing to on-going moderate growth, even a pick up.

There is no hint of a recession.

Retail sales are still growing, while dwelling construction is having its strongest year on record.

As the same time, the number of job vacancies has risen to its highest level in three years, which is pointing to firms having sufficient business growth to need more workers.

These are the polar opposite circumstances to a recession.

Interestingly, commodity prices are rising in Australian dollar terms.

They have been for several months. If this pick up is sustained, it will provide a boost to the economy. No longer can it be argued that the commodity price cycle is a negative for Australia.

The worst of the commodity price falls have seemingly past, aided by the low Aussie dollar.

There is a problem with mining investment, which is in free fall.

This is a large part of the background for those forecasting a recession. Weak mining investment will be a major drag on economic growth over the next two years.

The hope from the RBA and Treasury is that business investment in the non-mining parts of the economy will recover, offsetting the mining fall.

Also read: Economy coping with headwinds: Morrison

To date, this transition has been unconvincing but there are some tentative signs in the recent business expectations data of a more optimistic outlook.

Business confidence would need to be weakening across all sectors in there was any hint of a looming recession. It isn’t.

For all the misguided talk about recession, it is important to recall that Australia is entering its 25th year of unbroken economic growth.

While the economy is growing below what is desirable, the policy settings to support growth are in place and this is being aided by a decent performance in the world economy.

Australia is experiencing a soft rate of economic growth - yes. Recession - no. The two should not be confused.

Stephen Koukoulas is a Yahoo7 Finance expert with 

more than 25 years experience as an economist in government, as Global Head of economic and market research, as Chief Economist for two major banks and as economic advisor to the Prime Minister of Australia.