When are we in for our next recession?- Pete Wargent

With all the news of unemployment rising, manufacturers leaving, China’s problems some are asking when is Australia in for its next recession,  so let me start by saying…

We are all products of our environment and experience, so I despise recessions.

Can’t help that, I just do.

I was born in a seemingly thriving city with full employment, a “city on the move!” where the future seemed bright for all.

But when the steelworks, the factories and the coal mines started closing, unemployment rose from only 4% in 1978 to 11% by 1981.

Fortunately for me, I was still a nipper then and not searching for a job, but I can remember very clearly what it was like in the city’s tower blocks (grim).

By 1984, the city had an unemployment rate of 15.5% as the percentage of those employed in manufacturing fell from half to less than a quarter.

Then in 1984-5 the national miners’ strike was head-quartered in the city…and the rest you have probably heard before.

What I find most amazing when I read chat forums today is just how matter-of-fact people are when discussing the high suicide rates on the estates. “Anyone remember people throwing themselves off the top of the towers each weekend?”. “Yeah, me too. Quite a regular occurrence…”.

 

Bias

Does this kind of thing impact my view of the world today? Too bloody right it does.

When I analyse data, I suffer from confirmation bias, just as we all do.

If my analysis tends towards the upbeat and looking for positive news to confirm my belief that Australia is not headed for recession any time soon, then the root cause of that is explained above, and I will never be able to elicit sympathy for people who clearly hope for job losses.[sam id=40 codes=’true’]

What I had never realised until the advent of the internet, is that there is a whole community of people who actually want there to be a recession, to ‘re-set’ the economy.

Being a Brit, I’ve lived through a few recessions now, and in my experience at least , it doesn’t really quite work like that

Unfairly, it often tends to be those with capital reserves who are able to take advantage of lower asset prices, while the have-nots may grapple with lower wages, increased living costs or the evil spectre of unemployment.

That said, it is true that recessions can have a useful role to play in clearing up the excesses of the past.

Since the world plunged into the abyss from 2007 onwards, lest anyone needs reminding, there has been a long, drawn-out debate about whether Australia will fall into a recession.

Personally, I’ve never subscribed to that view although many have disagreed with me over all these years.

The good news is you don’t actually need to listen to my views, or indeed to those of the recessionists, since we have a fully independent body which employs a couple of hundred economists in order to assess where are most likely headed: the Reserve Bank of Australia (RBA).

 

Unemployment

Unemployment is forecast to increase a little through the next few quarters and then fall again in 2015:

“The unemployment rate has continued to move higher and the participation rate has declined noticeably. These factors are likely to continue to weigh on employment growth in the near term, and the unemployment rate is expected to remain on an upward trend for several quarters. 

This outlook for the unemployment rate over the next year or so is little changed from the previous Statement. 

In 2015, the expected improvement in the non-resource sector should underpin an improvement in labour demand, with growth in employment increasing gradually and the unemployment rate declining.”

The RBA sees low interest rates stimulating the economy and labour markets.

Growth and inflation forecasts

The RBA released its most recent output growth and inflation forecasts two weeks or so ago on February 7:

Source: RBA

One of the neat things about Australia having a long-standing and independent Central Bank is that they can use their track record to tell you how confident they are of their own forecasts.

Inflation is forecast to stay roughly within the target range of 2-3% until June 2016.

The implication of this is that interest rates may stay at historically low levels for some time since the RBA’s base case is for inflation to remain at around 2.5%  until 2016 (commensurate with the employment forecasts above).

Good news for homeowners and borrowers, less good news for savers.

 

As for the economy, the RBA projects GDP growth of:

-year ended June 2014: 2.25%

-year ended December 2014: 2.25% to 3.25%

-year ended June 2015: 2.50% to 3.50%

-year ended December 2015: 3.00% to 4.00%

-year ended June 2016: 3.00% to 4.25%

 

Looks like that recession will just have to wait a while.
[post_ender]


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Pete Wargent

About

Pete Wargent is a Chartered Accountant, Chartered Secretary and has a Financial Planning Diploma. He’s achieved financial freedom at the age of 33 - as detailed in his book ‘Get a Financial Grip – A Simple Plan for Financial Freedom’. Pete now manages his investment portfolio, travels and works as a consultant in the finance industry from time to time. Visit his blog


'When are we in for our next recession?- Pete Wargent' have 3 comments

  1. Pete Wargent

    February 27, 2014 @ 3:30 pm Pete Wargent

    Looking at today’s capex data, we might yet see another interest rate cut or two…

    Reply

  2. February 28, 2014 @ 3:07 pm David Kaity

    Hi Pete,

    Firstly a big thank you for the time and effort you put into sharing your thoughts and experiences in your regular, weekly blogs that are emailed by Michael. I have followed Michael’s emails and seminars over several years and I’m also passionate about property.
    Your last blog ‘When are we in for our next recession’ clarified for me the reason you hold the views that you do about the Australian economy and where it’s headed. Your admission of confirmation bias for positive and upbeat news is the driver for your tendency to dismiss the clear signs of an imminent recession. Let’s forget for the moment that – whether we like them or not – recessions are an inherent part of any business cycle, like breathing in follows breathing out. Let’s also forget that not ‘subscribing’ to the notion of recessions won’t actually eliminate them, like not believing in death won’t help you avoid it. My issue is that this ostrich policy about recessions leads to poor advice to the average mum and dad property investor. I know that money can be made from property in all types of market conditions and I also know that there is not one property market in Australia or any one city. However, when a serious recession hits, all property markets will be adversely impacted (some more so than others), especially after such a long and steep run-up in prices. I think your average reader would be better served if they were told how to prepare for a serious downturn and how to take advantage of it. Ignoring an imminent recession will not enable you to give such advice. With regards to forecasts, the RBA is the last place I would look. They are notoriously unreliable for predicting anything and you cannot expect otherwise from an organisation that looks mostly in the rear view mirror. Like most economists, the RBA was completely blindsided by the GFC. The timing of its exact catalyst was always going to be hard to call, but most economists didn’t even acknowledge the underlying issues (bubble), which were evident for quite some time. Only six years later we are experiencing a bout of dejavu. For this reason I recommend dismissing commentary from any so called economist who doesn’t have the ‘GFC track record’. There are a handful of luminaries, however, whose timely warnings of the GFC are well documented. These are the people to listen to and then act accordingly.

    Reply

  3. Pete Wargent

    February 28, 2014 @ 3:20 pm Pete Wargent

    Hi David,

    Of course, as a long-term holder of property, I expect there to be recessions. In fact, we’ve had more than one in Britain in the past 15 years.

    For me, I hold properties in London and Sydney in quality suburbs close to the city. Some other property commentators recommend regional properties. My experience in Britain was that London prices held up very well. Regional towns and cities got clobbered.

    Anyway, there’s no one size fits all advice that can be given on a blog. I’d be worried if anyone thought that there was.

    Reply


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