Are we heading into a recession?

Economist Ross Garnaut, has warned Australians to prepare for lower living standards, as the resources boom bites the dust.

Meanwhile, BHP Billiton (ASX: BHP)  has warned that Australia could lose 25% of its exports with China growth slowing, declining commodities prices, rising costs – all of which are leading to some mining projects becoming uneconomic. Some Chinese officials have already said that China is reluctant to introduce another stimulus package to lift the country’s slowing growth.

Because governments haven’t saved enough of the resources boom income in budget surpluses, it’s likely Australia could be forced to run up government debt, in order to keep economic growth alive. That could see much lower interest rates, a lower Australian dollar, and see us lose our AAA credit rating. Standard & Poors have said that our sovereign rating assumed that budget cuts continue. That won’t happen if Australia is forced to run deficits for a number of years.

Australia could be heading into a recession (defined as two consecutive quarters of negative growth), which could feature higher unemployment, lower house prices and very weak credit growth – all bad signs for our banks, including the big four, Australia and New Zealand Banking Group (ASX: ANZ)Commonwealth Bank of Australia (ASX: CBA)National Australia Bank (ASX: NAB) and Westpac Banking Corporation (ASX: WBC).

We could see miners lay off thousands more workers – it has already started, with Fortescue Metals Group (ASX: FMG) losing 1,000 employees and coal mines shutting down and shrinking operations, resulting in around 2,000 workers losing their jobs.

Because we’ve had 21 years of uninterrupted growth – even during the GFC Australia grew, many of us may be mentally unprepared for how bad it could get. But its easy enough to be prepared for what may come and if it doesn’t then you’ll be ready for the next time.

Once you accept that there will be periods of weakness and recession ahead and that we probably can’t predict what and why, it can actually be quite a calming realisation. You stop trying – in vain – to know all the answers. Instead, control the controllables, focus on what Steven Covey calls your ‘circle of influence’, and extend your investing horizon so that what seem like major economic dislocations become small bumps in the longer term trend.

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Motley Fool writer/analyst Mike King owns shares in BHP. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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