3 risky businesses to avoid if the Australian economy deteriorates

The Australian economy is once again in the headlines – although in fairness, when is it not? This time, concerns are growing that our national debt binge could have finally reached a peak. An economic downturn could hit hard, given current high levels of household debt, and this would have a knock-on effect for businesses in a variety of ways.

Here are 3 that could be hurt in a downturn:

G8 Education Ltd (ASX: GEM)

The cost of childcare is quite high. Depending on where you live and how many children you have, it can be more economical to have one parent stay at home as caregiver rather than have both parents working full time. Plus, if unemployment rises, a larger number of parents will be at home to take care of the children, reducing demand for this service.

Childcare might be ‘essential’ when both parents are working full time, but – government support notwithstanding – I’m not convinced that it is the kind of essential expense that will live on in a downturn.

Genworth Mortgage Insurance Australia (ASX: GMA)

Unemployment is the primary driver of claims against Genworth’s Lenders Mortgage Insurance (LMI) products. Recently we’ve seen that unemployment has been linked to a collapse in house prices (e.g. due to mining work drying up in regional towns) which has led to higher costs on each individual claim. This is because house values fall below the value of the loan, increasing the amount that Genworth has to pay to the lender it is insuring.

It’s uncertain if this pattern could repeat in a major economic hub like Sydney, given the high interest from international buyers, but I’d be uncomfortable relying on Genworth if times were getting tougher.

AP Eagers Ltd (ASX: APE)

AP Eagers is a bit of a mixed bag. On the face of it, the business will be hit hard by an economic downturn, with fewer new car sales and less demand for dealer finance.

On the other hand, AP Eagers owns a sizeable used car business and has paid a dividend every year since 1957. So will it live through a downturn? I reckon so. I’d be willing to bet that the group’s decade-long streak of unbroken profit growth could be in for some revision, however.

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. 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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