Will Australia see a recession in 2017?

Despite Australia’s record-breaking run of GDP growth, recently the chatter has increased about the possibility of Australia experiencing a recession.

The last time Australia was in recession, Paul Keating had just ousted Bob Hawke as Prime Minister, Daryl Braithwaite was riding “The Horses” high on the charts and we had just been introduced to a new Pippa on Home and Away.  Above average inflation, double digit interest rates and a global market collapse in the late 80’s created a perfect storm that resulted in a 1.6% fall in gross domestic product (GDP) in the September quarter of 1990.  This triggered a recession that lasted for 12 months, finally lifting in the September quarter of 1991.  The period is immortalised by then Treasurer Prime Minister Paul Keating’s phrase “the recession we had to have”.

While this recession saw businesses collapse, unemployment hit a record high of 11.25% and wage growth halt, it ultimately purged the economy of high inflation and an exorbitant cash rate.  It also led to a raft of economic reforms which has now seen Australia break the world record for the longest period of uninterrupted growth.

While many economists predicted negative growth in the latest GDP figures, Australian Bureau of Statistics data shows a slim 0.3% growth for the March quarter, reminiscent of what was seen during the global financial crisis in 2008 and 2009.  Treasurer Scott Morrison summed it up best this week, saying, “a generation of Australians have grown up without ever having known a recession.”

Many Gen X’s and Y’s are already complaining about the cost of living and housing affordability, not realising they are living through the greatest economic period around the world – ever.  With growth continuing to slide and many economists anticipating a recession in the near future, what would a recession look like for this generation?

Unemployment

The official unemployment rate has been on the rise since 2009, peaking at 6.2% in August 2015.  Since early 2016, the rate has hovered just below 6%.  In 2015, Canada faced a technical recession which saw the loss of 71,000 jobs in one month.  South Africa is currently in recession, with an unemployment rate of 27%.  During Brazil’s recent recession, unemployment climbed by 76%.

With Australia’s national debt already closing in on $500 billion (whatever happened to the ‘debt and deficit disaster’?!), having anywhere between 10 and 30% of the population out of work would place enormous pressure on an already overextended welfare system.  It would also entirely contradict Prime Minister Malcolm Turnbull’s election platform of ‘jobs and growth’.

Interest rates

When Australia entered recession back in 1990, interest rates were steady at 14%.  Over the next three years, the rate dropped steadily to 4.75%, before increasing again in 1994.  Since the end of the Global Financial Crisis, the Reserve Bank has again wound back interest rates, going up and down but never peaking above 4.75%.  In an effort to stimulate growth, the RBA has been consistently dropping the cash rate since 2011, with the current rate of 1.5% on hold for close to a year.  If a recession were to hit Australia, we would likely see further drops to the cash rate, which is great news for borrowers, but bad news for those trying to save and grow their wealth.

Currency/exchange rate

While there are many factors affecting the Australian Dollar against overseas currencies, economic uncertainty can make the dollar lose ground – as can a drop in interest rates.  But a weaker dollar isn’t necessarily a bad thing.  It makes manufacturing, tourism and exports far more attractive overseas, fuelling growth in employment.  The downside is to any Aussies travelling overseas, who can expect to fork out a lot more for a holiday.

We’ll be watching the economic data closely in the coming months to see if there is any deterioration in economic conditions.  If you’re concerned about what this might mean for you, please don’t hesitate to visit www.infocus.com.au and make an appointment with your local Infocus financial adviser today.