High profile economist Gerard Minack has outlined his view as to why he believes Australia is headed for a recession. In an interview with the ABC's The Business, Minack warned that the combination of a decline in resource sector activity, a slowing of the housing boom and the flow-on effects of the automotive manufacturing industry shut-down could all contribute to a recession.
Minack's view that Australia could enter a recession is not new and it's a scenario which he views as almost unavoidable. Exactly when it occurs, he isn't sure but it appears Minack expects it is a case of when, not if the economy will enter a recession. Investors may have formed a similar view as The S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) is down close to 9% since its recent high in late April which means the market is close to entering a "technical correction."
It seems like investors are already downgrading expectations and reducing their risk profile. This 'risk-off' situation and investor nervousness has flowed over into what was a red hot Initial Public Offer (IPO) market. The IPO pipeline now looks to be burning less brightly with Greenstone abandoning its float plans.
Meanwhile, the economic news out today that Westpac's monthly consumer sentiment index showed a worse-than-expected reading of 95.3 further reinforces the view that the economy is set to experience a difficult period ahead.
What should you do?
The first thing to do is not panic. The economy has endured recessions before and well-prepared investors and companies have navigated their way through on every occasion. The second thing to do is consider whether your portfolio is well positioned if the economy does enter a sustained period of turbulence and contraction.
This could involve raising your cash levels but equally it could involve increasing your exposure to defensive businesses. Companies such as Transurban Group (ASX: TCL) which operates toll roads, Ramsay Health Care Limited (ASX: RHC) which operates hospitals and CSL Limited (ASX: CSL) which manufactures life-saving therapies and vaccines are all businesses which have desirable defensive characteristics that should continue to produce robust earnings even during tough economic times.