Is Australia headed for a recession?

Credit: rudsbp1

According to former Greek finance minister Yanis Varoufakis, Australia is most certainly headed for a recession thanks to slowing growth in China and weak domestic investment.

Mr Varoufakis has told Fairfax Media that China was crucial to Australia’s fortunes, but the world’s second-largest economy was “not at the stage of development where it can continue to defy the global deflationary atmosphere.

He continued, “There will be a recession in Australia, because of the collapse of investment and because of the collapse of animal spirits – and this is because of what’s happening in China.

But he also added that some recessions are necessary, “a bit like bushfires that clear out the forest, and help with the regeneration”.

He’s certainly right about China being essential for our growth. The country takes most of our exports, including our two major exports iron ore and coal. Both commodities face the likelihood of stagnant low prices for many years following the resources boom of the past several years.

That means lower tax revenues for Australia unless other parts of the economy are growing strongly and taking up the slack from the declining resources sector. So far, that appears to be taking longer than expected.

Mining investment has fallen significantly and continues to fall, with forecasts suggesting it won’t hit bottom until 2018. Bad news for the mining services sector. Building construction has taken up some of the slack, but business investment for the three months to the end of September unexpectedly fell by 9.2% compared to the June quarter. Mining was down 10%, but manufacturing was up nearly 7% – helped by the falling Australian dollar.

On the upside, companies’ operating profits and inventories were better than expected, and unemployment remains low, actually falling to 5.9% last quarter. Interest rates remain low, and are expected to remain low, possibly right throughout 2016, and the Australian dollar at 72 US cents makes exports attractive, while bringing in overseas visitors. Great news for tourism operators.

Australia’s big four banks Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) have all recapitalised and are now stronger too.

At some stage, it’s inevitable that Australia will see a recession. After 23 years of uninterrupted growth, the chances of a recession occurring rise, but personally, I can’t see it happening anytime soon.

Foolish takeaway

Unless there’s a major unforeseen global event that affects Australia, we won’t be seeing a recession for some time – despite the views of a number of people – Mr Varoufakis included.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. 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.

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