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Recession risk rising

The risk of an Australian recession in the next two years is about one in four according to an influential survey of academics and economists. Curated by The Conversation, its initial economic survey addresses a wide range of topics. Here we will examine just the economic growth survey. Meanwhile, latest GDP figures show just how significant government expenditure is for maintaining positive economic growth.

Summarising the survey in The Conversation, Peter Martin, its Editor of Business and Economy commented of the survey participant’s views:

“Taken together their forecasts point to no recovery in the share market during 2019, no recovery in wage growth, no further improvement in the unemployment rate, further modest home price falls in Sydney and Melbourne, and to a budget deficit next financial year despite the official forecast of a surplus…”

Expectations include a weaker US economy and slower Chinese growth and continued sluggish growth in Australia’s consumer spending. Most of the survey respondents consider the RBA will hold the cash rate at 1.50% through 2019.

Adding to the domestic pressures, but in an unrelated piece in The Guardian, Greg Jericho points out that public infrastructure expenditure has been delivering around three times its normal level of contribution to economic growth over the last four years.

As the chart below indicates, as private engineering construction spending (most of which was the mining construction boom) came off the boil, public expenditure increased.

fig13

There are two critical points about this. 

First, as Jericho writes:

“The last time public infrastructure spending contributed so much to domestic economic activity was during the global financial crisis and then before that, after the 1990s and early 1980s recessions.”

That’s right. This is government expenditure that is helping to keep the Australian economy moving forward.

Second, both the public and private sectors’ expenditure on engineering construction/infrastructure turned down in the September quarter (see below), even as the value of residential and non-residential building work commencements declined by 2.8% on the previous year.

That’s also right. The building related factors contributing to positive economic growth have all turned down, around about the same time.

fig14

So, what’s this recession risk story all about?

Because technically, a recession requires two consecutive quarters of negative economic growth (a contracting economy), it is a big deal when the R word is mentioned.

As the table below shows, the panel expects the Australian economy to grow by an average 2.6% over 2019. That is slower than the 2.8% of the most recent year.

fig15

 

That is not quite a recession, but with the economists generally expecting the US economy to contract and concerns over China’s ability to spend its way back to stronger growth, the external factors are weighing on the Australian economy.

On the specific question of possibility of recession in the two years to January 2021, the average lands at 25%, or 22% when the extremely bearish Steve Keen’s view is taken out of the survey.

fig16

It isn’t just the international factors, domestic factors are also weighing on the economy. The average of the economists considers, for instance, that wages growth will continues to be sub-optimal at just 2.3% per annum. With underlying inflation at 1.9%, that’s real wages growth of just 0.4% per annum. That would not cover a single interest rate rise!

Luckily, the consensus is that the RBA will not increase interest rates over 2018.

So, eight quarters to go, and there’s a one quarter chance of one quarter of them having negative growth? Well, we’ll certainly see, but one thing is for certain, there is a lot of downside risk at the moment.

With an election in the offing, it’s those filling the Treasury and Finance portfolios who will have most to ponder.

 

Posted Date: February 7, 2019

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