Recession in Australia ‘unlikely’ following promising signs
While growth in the Australian economy may be going through a rough patch, there are a number of factors which suggest the decade-long underperformance of Australian shares may be coming to an end, says an economist.
AMP Capital chief economist Shane Oliver said that following the rate cut, there has been a lot of discussion around a recession being inevitable, with the housing cycle still down and a high level of underemployment limiting wages growth.
However, the gloom around the Australian economy has gone over the top, he said, with the economy also still showing positive signs.
“The share market is at an 11-year high, up by 16 per cent year-to-date and just 4 per cent shy of its 2007 resources-boom high,” Mr Oliver noted.
He also pointed out that Australia’s current account deficit is the lowest it’s been since the 1970s, with high iron ore prices and solid growth in export volumes pushing the trade balance into a record surplus.
“The big drag on growth, which was up to around 2 percentage points at one stage, as mining investment fell back to more normal levels as a share of GDP, is likely over and mining investment plans look to be moving up again,” Mr Oliver said.
He also predicts that the Australian dollar is likely to fall further, which will make Australian businesses that compete internationally more competitive.
Despite the falls in property prices, he said, there haven’t been signs of a crash.
“Non-performing loans are still relatively low even in Perth where prices are down by nearly 20 per cent. There has been no significant panic selling,” he explained.
“The switch for many from interest-only loans to principal and interest has not seen mass defaults or mass selling. And the combination of the removal of the threat to negative gearing and the capital gains tax discount along with rate cuts has seen buyer interest return.”
He also noted that Australia’s population growth remains strong at around 1.5 per cent per annum.
“While it’s far from a world beater — with the top 10 countries by population growth seeing growth of between 3 and 5 per cent per annum — it is at the high end of comparable countries and roughly double the OECD average and of the US and UK, and is faster than India,” he said.
While higher population growth is not without its issues, he said, it does mean the challenges with ageing population are less severe compared with other advanced countries by comparison.
“Australia with a median age of 37 is relatively young and it has a relatively low old age dependency ratio,” he said.
While the official cash rate is at the record low of 1.25 per cent, it can still go lower, he added.
“Our view remains that the RBA will cut the cash rate to 0.5 [of a percentage point]. [Cutting it] beyond this, it will probably conclude is of little benefit as it will make it harder for banks to pass on rate cuts as they will have more bank deposits at zero, and so cutting mortgage rates would mean reduced profit margins and probably less lending,” he explained.
Barring a significant global downturn which threatens Australia’s export earnings, a recession is therefore unlikely, he said.
“It’s worth noting that the Australian share price index has underperformed global share markets for almost a decade now, reflecting tighter monetary policy from October 2009, the surge in the $A into 2011, the end of the commodity price boom, worries about a property crash and a mean reversion after Australia’s 2000 to 2009 outperformance,” he said.
“Many of these factors have run their course, have reversed or have been factored in by the share market, so maybe the decade-long underperformance by Australian shares is coming close to an end.”
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates. Miranda has also directed SMSF Adviser's print publication for several years.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.