Despite the weak economic data, Treasurer Joe Hockey says there is no risk of a recession in Australia.
Yesterday's economic data showed that Australia's growth was the slowest in two years at 0.2% for the three months to June. Australia's terms of trade (the difference between the prices of exports and imports) was the lowest since the Global Financial Crisis.
When inflation was included, GDP (Gross Domestic Product) growth was 1.8% – the lowest since 1962, according to the Australian Bureau of Statistics. A recession is defined as two consecutive quarters of negative economic growth.
And Mr Hockey has a warning, (aimed at the Labor Party?)
"But, if we don't continue down the path of delivering free trade agreements, getting rid of taxes, getting rid of regulation, and opening up more of the Australian economy to competition, then we will risk significant job losses and slower economic growth."
The treasurer pointed to evidence that Australia is already moving away from a reliance on our mining industry to prop up the economy. If he's referring to Australia's booming house prices, then our economy might be on shaky ground.
Independent economist Saul Eslake also says he doesn't see a recession ahead, but noted that Australia is more at risk from external shocks than if the economy was growing at a faster pace.
The biggest concern for Australia's economy is our dependence on continued growth in China. Mineral exports are still the largest contributor to national income despite recent commodity price falls and China consumes much of our mineral exports. Mining production fell 3% in the last quarter, having a significant impact on economic growth.
The good news is that the falling Australian dollar – currently sitting just above US70 cents – helps our exporters and companies with global operations, while making imports less attractive/more expensive.
The lesson for investors is that international diversification is more important than ever.
Investing in companies with overseas earnings and exporters as well as investing into foreign companies on overseas exchanges is vital. The recent pullback in prices is the perfect opportunity to get set in the likes of CSL Limited (ASX: CSL), Cochlear Limited (ASX: COH), or Flight Centre Travel Group Ltd (ASX: FLT)
Should Australia fall into a recession, these companies can provide a boost to your portfolios, offsetting local company performance.
