Australia’s economy has had a dream run – 24 year run without any serious economic downturn.
But overseas economists are tipping that we could have a recession over the next year.
And of course they’re worried our “housing bubble” will burst.
Why do I say of course?
Because that’s what the overseas economists have been saying (incorrectly) for years.
But they could be right that we’ll fall into recession
The Wall Street Journal recently examined Australia’s economic future in an article titled “Is Australia Sliding into Recession?” saying Australia has ridden one of the longest economic expansions in modern history: a run of 96 quarters without a bust.
Our economy has dipped into contractions three times in that period—in 2000, 2008 and 2011—but never for two quarters in a row.
Few other developed countries have such an impressive record, although in earlier decades the Netherlands and Canada clocked up 103 and 77 quarters, respectively, without a recession.
And yesterday’s economic figures showed our economy stuttered during the three months to the end of June, undermined by reduced mining and construction activity coupled with a decline in exports.
Wednesday’s national accounts showed the economy grew at a feeble 0.2% in the June quarter, half the rate expected by economists.
It compares with 0.9% growth in the previous three months – one of the fastest quarterly expansions in the world during that period.
Annual economic growth has slowed to just 2%, well below its long-term average of 3% to 3.25%.
The treasurer, Joe Hockey, insisted the latest growth figures were in line with his budget forecasts and came at a time when other commodity-based countries were in recession, saying:
“The diversity and flexibility of the modern Australian economy is continuing to get us through the recent massive falls in commodity prices,”
The treasurer cited one-off factors, including a 7% fall in mining exports because of port closures forced by bad weather, for the poor figure.
And we have a housing bubble
The article also suggests that Australia has a housing bubble that is probably the most obvious in the world, quoting British economist Chris Watling of the London-based research firm Longview Economics.
Watling believes it wouldn’t take much for Australia’s property bubble to burst, and that the country could be headed for a recession within the next 12 to 18 months.
Watling holds this view because he sees Australia through the prism of the Netherlands, which underwent a lengthy period of economic expansion before a debt-fueled housing bubble burst in 2008.
The article also quotes Credit Suisse Sydney analyst Damien Boey who believes even a slight cooling in Australia’s housing market could cause a recession.
“There’s a decent chance of recession over the next year,” said Boey. “We just have to see house prices flatten out to get much more bearish on growth.”
Source: Wall Street Journal
It’s partly due to China
China is providing these economists with another cause for concern as it buys roughly a quarter of Australia’s exports.
But its slowing economy translates into less construction of skyscrapers, bridges and railways—hurting demand for raw materials like iron ore.
The darkening outlook, underpinned by deeply disappointing data in recent days, has prompted several economists to warn that Australia—which has gone 24 years without any severe downturn—may finally be ripe for a recession, commonly defined as two straight quarters of contraction.
“We wonder: is Australia already in recession?” said George Tharenou, a Sydney-based economist at UBS.
He said even one quarterly contraction could have a big psychological impact on a country where an entire generation hasn’t known a recession and confidence is already fragile.
Still, some leading economists aren’t convinced a recession is imminent
“Recessions do not happen because the calendar says they should,” said Saul Eslake, an independent economist who formerly worked for Bank of America Merrill Lynch.
He said the RBA had room to cut interest rates further from 2%, to boost growth, and that the weakening Australian dollar was helping cushion the blow for exporters.
In a recent interview with the Wall Street Journal, Treasurer Joe Hockey, too, said fears over a major downturn in Australia were overblown.
Even pessimists like UBS’s Mr. Tharenou believe a recession, if it happens, would likely only be fleeting.
He points to several new liquefied-natural-gas, or LNG, projects just coming online that will give a big boost to GDP in the years ahead. “Even if real GDP falls, it would arguably be a ‘phantom recession,’” he said.
In the meantime what should a property investor do?
Firstly it’s important to be aware of the macro economic factors affecting our markets and be prepared for a change in pace in our economy.
By the way…I’m still buying property because I take a long term perspective.
The last time I bought one to add to our portfolio was 5 days ago and I’m looking to add another one by the end of the month.
But I’m being very selective in what I buy.
If you’re wondering what to do…
If you’re looking for independent advice about what the future may hold for your property portfolio, no one can help you quite like the independent property investment strategists at Metropole.
Remember the multi award winning team of property investment strategists at Metropole have no properties to sell, so their advice is unbiased.
Whether you are a beginner or a seasoned property investor, we would love to help you formulate an investment strategy or do a review of your existing portfolio, and help you take your property investment to the next level.
Please click here to organise a time for a chat. Or call us on 1300 20 30 30.
When you attend our offices in Melbourne, Sydney or Brisbane you will receive a free copy of my latest 2 x DVD program Building Wealth through Property Investment in the new Economy valued at $49.
Subscribe & don’t miss a single episode of Michael Yardney’s podcast
Hear Michael & a select panel of guest experts discuss property investment, success & money related topics. Subscribe now, whether you're on an Apple or Android handset.
Need help listening to Michael Yardney’s podcast from your phone or tablet?
We have created easy to follow instructions for you whether you're on iPhone / iPad or an Android device.
Prefer to subscribe via email?
Join Michael Yardney's inner circle of daily subscribers and get into the head of Australia's best property investment advisor and a wide team of leading property researchers and commentators.