Australian Economy

The key ingredient for a deep Australian recession is missing, but it’s not gone away

Australia is close to recession.

Gross domestic product (GDP) for the March quarter grew at 0.1 per cent.

Surprising strength in the household sector and increased government spending hauled the economy over the first quarter finishing line.

Being on the edge of a recession is concerning because extended periods of economic contraction are nothing short of brutal.

Technical recessions — defined as two consecutive quarters of negative economic growth — are associated with surging unemployment and plummeting asset values (including property and shares).

In some cases, superannuation nest eggs can be wiped out, pushing retirees from a comfortable retirement to one reliant on government subsidies.

While the Australian economy is clearly weak, Reserve Bank and Treasury forecasts have economic growth accelerating later this year.

So, that’s that, then.

Not quite, and I’ll explain why.

Households are the key

The Australian economy is in a funk.

The pandemic, and the supply constraints and stimulus that came with it, produced higher inflation.

The Reserve Bank responded with tighter monetary policy (higher interest rates) and the federal government with spending “restraint”.

The business community has since shown some resilience but pulled back in the first three months of this year with private investment falling by 0.8 per cent, “driven by a decline of 4.3 per cent in non-dwelling investment”, the ABS noted Wednesday.

Australia is also importing more than it’s exporting, which is a negative for economic growth.

It’s the household sector that’s shown unexpected strength, expanding by 0.4 per cent in the quarter, helped by consumers saving less and, in some cases, dipping into their savings to help pay for essentials.

Two people carrying umbrellas walk through a mall with wet pavers

The government is banking on an ease in inflation by the end of the year to free up households to spend more money.(ABC News: Justin Hewitson)

And this is where we hit a key point.

Federal government tax cuts, energy rebates, and real wage growth (helped by an increase in the minimum wage by Fair Work), will provide households will the support they’ll likely need to, well, keep spending on essentials.

It’s hoped by the end of the year inflation will have further subsided and the Reserve Bank will be able to ease monetary policy, freeing up households to spend further.

You can see why few, if any economists, are forecasting a recession.

But an obvious threat is missing from the commentary.

Enter the financial markets panic

The Great Depression was preceded by the 1929 Wall Street crash.

Australia’s 1991 recession was preceded by the October 19, 1987, stock market crash — known as Black Monday.

The economy was running well in 1987, growing at 2.6 per cent per annum.

But in the years prior, too much money flooded into the stock market.

Is there too much flowing into financial markets today?

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