Recently, talk that Australia could be headed towards a recession or a stock market crash has re-emerged in the media. The potential causes are myriad, including:

  • Very high levels of household debt, with total household debt at 123% of GDP, among the highest in the world (UK and USA in mid 70%-80%)
  • An overheated housing market could collapse, reducing consumer confidence and spending
  • Sizeable budget deficit; too many cuts to spending or poor fiscal policy could crush growth and stopper innovation
  • Both Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank Ltd. (ASX: NAB) have warned Australia is at risk of losing its ‘AAA’ credit rating. It is implied the loss of this could lead to higher borrowing costs for the banks and this would be passed on to consumers, increasing pressure on the housing market

The last time Australia lost its AAA rating was in 1989, just prior to our last recession. If a lower rating lead to higher borrowing costs for the banks – which are already facing margin pressures – this would have to be passed on to consumers, and could act like a de facto interest rate rise. Rising interest rates would put pressure on household debt, which would reduce consumers’ confidence and taper their spending habits.

Businesses like Greencross Limited (ASX: GXL) have already demonstrated a vulnerability to declines in consumer spending, as shown by recent – terrible – sales performance in the company’s Western Australian stores. Others like G8 Education Ltd (ASX: GEM) and Flight Centre Travel Group Ltd (ASX: FLT) have a question mark hanging over them thanks to their heavy exposure to consumer wallets.

It’s an open question what would happen to the Big Four banks, but it wouldn’t be a surprise to see house prices fall, consumer borrowing fall, and bad debts rise, which wouldn’t be ideal for their share price. Recent changes to bank capital structures have increased the resilience of Australia and New Zealand Banking Group (ASX: ANZ), Westpac Banking Corp (ASX: WBC), and Macquarie Group Ltd (ASX: MQG) to market shocks, however.

Macquarie Research and Credit Suisse in particular have become quite wary of Australia’s property market, and have previously warned the sector is ‘now riskier than equities‘ (shares).

So, are we going to have a recession?

I have no idea – and I suspect that many people with more experience, greater intellect, and a better education than me don’t know either. However, it wouldn’t be a bad time for investors to have a good, hard look at their financial situation, and make sure their spending remains less than their income.

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Motley Fool contributor Sean O'Neill owns shares of Flight Centre Travel Group Limited, G8 Education Limited, and Greencross Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.