Tuesday, September 8, 2015

The coming Australian recession...?

I buried my prediction of the first Australian recession in decades in a post back in May, because I wasn't quite sure it would come to pass. Today, in the light of the most recent quarter having growth of a measly 0.2%, Fairfax runs an Ian Porter piece laying out the reasons for believing that the recession will come in the next year or two, which boils down to the delayed effect of the Abbott decision to cut off assistance for the car industry and its subsequent withdrawal from the Australian economy.

The timing is interesting electorally, because the process of up to 200,000 automotive workers losing their jobs is due to be completed in 2016/17, with a full Abbott term due to finish in November 2016. We are already in some hinky territory with the Chinese slowdown, albeit currency devaluation has solved a lot of problems for our exporters and there's probably more room to drop below the current ~70c.

The last budget was a cash splash so large that it caused many pundits to think it was priming the Keynesian pumps for an early election, yet the economy is barely escaping contraction as it is. Far from a budget emergency, now we have a growth emergency, which will be followed by an employment emergency. Hockey hasn't really got any more gears to shift up fiscally, so when the automotive fecal matter hits the Centrelink air circulation equipment, the job of stimulating the economy is going to fall to the RBA, which has only 200 base points to play with and would only be forced to burn them under great duress given the housing market is already hubba-bubba-double-trouble. Then we hit the zero lower bound, and we're cactus in a Mad Max Fury Road scenario.

This is playing out a bit like George W. Bush's last days, where all of his dud decisions culminated in a massive economic and political collapse. Just as Dubbya is now seen as a contender for the worst US President in history, Tony Abbott is shaping up to be the worst Australian Prime Minister in history if these doomsday detentes come to pass. All we could do was sit back and enjoy the hot licks from the Doof Warrior.


  1. sorry M0nty but the budget overall was less expansionary then the previous one.Yes spending did increase but so did taxation.

    With bond yields sol ow they should have boosted infrastructure spending a lot but may have missed the boat.

    A floating currency depreciates . Only a government can devalue.

    too many catallaxisms here.

  2. Yeah Homer, there was a bit of a disconnect between how the pundits reported the budget and how it was actually structured. The government were given brownie points for Keynesianism but there was not much actual stimulus effect - leads one to conclude that maybe we would have been in the first quarter of a recession already if the spending hadn't blown out.

    Do you think Hockey seriously has any political wiggle room to increase stimulus if we get one quarter of negative growth to prevent the second and an official recession? Of course there are lags involved, but they will get plenty of fair warning... the current quarter's 0.2% constitutes that, you'd reckon.

  3. The policy is still expansionary. I can only remember Swan's budget actually contracting GDP.
    I am not sure net exports will have such an effect over time.

    The BIG question is whether non-mining investment makes up for the fall in mining investment.

    The fall in the currency helps there.

  4. And will that investment be in something more useful than housing sepculation?

  5. 12K Syrians coming to Oz, mOnt, you must be so proud. Hope they all get resettled in your suburb.