Prepare for recession

Batten Down the Hatches

It’s time to prepare for recession. That’s my opinion and there are three overlapping risks for why I think so.

Risk 1: The mining bust

Yesterday’s capex report has confirmed the fears I’ve expressed for two years. The mining boom is not having a soft landing. It is bursting. Consider the kind of falls in business investment reported yesterday. The first estimate for business investment for 2014/15 was $125 billion:


That’s down from $166 this year. If you add a realisation ratio averaging the last three completed years you get to a total closer to $140 billion. That’s roughly a 2% of GDP fall. But, given the extent of weakness, one can rightly ask if a lower realisation ratio isn’t more appropriate. And if it is then the fall could get closer to 3% of GDP (although the blow would be softened somewhat given part of the CAPEX expenditure are imports, whereby a reduction adds to growth). In simple aggregate terms, even a more benign realisation ratio delivers a fall in business investment above 10% which is comparable to the 1982 recession and approaching 1991. Then we’ll do it again in 2015/16!

Business investment creates jobs. Without it, jobs shrink. This is an employment shock in the making, even if the reduction to GDP is offset in part by rising net exports.

Risk 2: Policy blunders

These are stacking up at an alarming rate. Going into the above our fiscal authorities have adopted a hard line on structural change in manufacturing. Letting the car manufacturers go at this stage was a big mistake. Manufacturing should be a part of rebalancing investment but is instead collapsing:


With a soft economy and lousy sales there is every chance that the auto-makers leave earlier than planned, adding to the employment and growth shock.

The second fiscal blunder is the manner in which the Government is conducting its drive to improve competitiveness (which is the right thing to do). There is little sense of management or of shared burden in the process. Rather, it looks like a long held back collapse being egged-on by a desire to destroy unions.

Related is the drive for Budget repair, which is being pursued not within a framework of collective community action as we move beyond the China boom, but via harsh rhetoric and inconsistent political favours.

Both are going to spook consumers wrestling with rising unemployment. Indeed both already have with rising unemployment expectations and confidence plunging post-election:


The third blunder is that monetary authorities have reacted too late and haven’t innovated appropriately for their situation with new tools that dramatically lowered the dollar and released pressure on consumers without ramping risk in the housing market. As a result we have a FAR TO HIGH currency and a housing bubble on the threshold of its highest valuation in history and our only redress is to do more of it.

The Australian economy is now, and will remain so for three years, completely dependent upon rising house prices and consumption for growth. The moment they stall or fall the underlying economic weakness will present itself.

Risk 3: China

I don’t know how committed China is to reform. Neither do you. Nobody does. But it doesn’t matter, really. Australia’s situation is three years of falling business investment. If China pursues reform aggressively we’ll face a terms of trade and national income shock in the next year.

If China slows the process down and allows credit to run, it’ll probably endure some kind of financial crisis within the three year time frame anyway. Either way, the risk is that Australia faces significant falls in the terms of trade and an income shock at some point while business investment is still falling.


I’m not forecasting a recession. Aside from anything else, it’s true that headline growth will get a lot of support from net exports and there is room for more rate cuts, as well as government spending. There’s the population ponzi too which means growth per capita has to go backwards almost 2% to even register as a headline recession. Although, if times get tough, it too will stall.

But that doesn’t mean as individuals we can’t get poorer - via rising unemployment and falling real income growth -  even if the authorities are happy to bury the fact.

I am simply pointing out that the risks above are very real and as such an investment posture incorporating an unusually high chance of recession is appropriate. I am making this call early and nimble investors may not heed it but for the slower moving it’s better to be preparing on the up slope not the down. That means exiting or avoiding positions in illiquid assets, avoiding exposure to cyclical businesses and hedging via the currency which is going to fall a long way if things go pear-shaped.

143 Responses to “ “Prepare for recession”

  1. Janet says:

    Okay. I’ll do it for you…I, am forecasting a recession. No, wait, a Depression. Yup. With a capital D. Why? In addition to those 3 points:
    Point 4. The Balkans will spread – it’s going to get nasty – socially and financially; and take a continuingly fragile Europe down the economic hill with it. Once they go, the rest of us will follow…

    • Merk says:

      So be it
      Threaten no more
      To secure peace is to prepare for war

      edit: h/t Metallica. I also am not forecasting war, but ‘the risks are very real’

    • interested party says:

      It will most likely start with some conflict ( as per your thought) then flow to an oil shock, then it’s game on. Cool heads globally will help push the predicament we are in out for a while longer….but I see the trigger risk as off-shore.

    • md says:

      Janet, just to be devil’s advocate, what happens in the Balkans and the rest of Europe could mean more people headed to the safety of Australia – and that means more demand on property.

      • Janet says:

        Precisely! That’s why I see 0% cash rate and an A$ head to the moon. Essentially any property market is governed by its indigenous population. There has always been foreign buying into our markets – The British, the Japanese, the Americans, The Chinese, the….Ukrainians?!, but the resident population sets the mass market price. It still will. So ultimately we get – 0%, A$ higher, unemployment up in large and…..tada!…a property market collapse ( fewer jobs pay the bills etc)

    • oliver47 says:

      By “Balkans” are you referring to the Russian buffer states: Ukraine, Belarus, neither of which host the Balkan Mountains?

  2. moderate mouse says:

    Yep….stormy few years ahead for sure. I fear that a real step-change in living standards is on the cards and will hit the most vulnerable hardest. We may for the first time see the emergence of a true underclass and a two-tierd society as exists in the US….with outright poverty on full display in almost every city and town. It’s easy to fall into the trap of seeing the coming change as a long-overdue serving of humble pie for a greedy culture, but many of those impacted the most will have shared little of the good times.

    (P.s Edit: ‘FAR TOO HIGH’)

  3. The Lorax says:

    Re: population ponzi: Why isn’t GDP per capita more widely reported?

    With the mining boom moving into the production phase (and if mineral prices hold up) the RSPT sure would help with budget repair.

    You can add the PPL scheme and proposed doubling of defence spending to the inconsistency on budget repair.

    • AB says:

      “Why isn’t GDP per capita more widely reported?”

      That’s easy when you remember that advertisers are the media’s customers, not viewers/readers/listeners.

      It’s not in anyone’s interest to scare the sheep. Except the sheep’s of course but they don’t really matter in the greater scheme of things.

  4. Gunnamatta says:

    Yep, you’ve nailed it……..

    You have made the point for as long as I have been following this blog that Australia has charted for itself (with both sides of Australian politics) a course towards a long hard economic adjustment grind with a globally uncompetitive economy, essentially made more uncompetitive by the enfilading positions taken on any reform process by either the mining lobby or the real estate lobby, backed strategically by the lack of awareness about what is unfolding/lack of preparedness to acknowledge what is unfolding/policy position to account for what is unfolding/speciousness of the RBA and Treasury in terms of addressing what is unfolding at a strategic rather than band aid level – all this cemented into place by our pusillanimous politicians, who are gripped by the real estate, banking and mining lobbies courtesy of the most utterly feeble media in the developed world.

    That is our reality. That is what needs address. And that address will be particularly painful.

    The Liberals have decided that the beneficiaries of the status quo will be looked after by punishing the future. The ALP has seemingly decided that it needs a decade of irrelevance to sort out its issues. About the only people going into bat for a more productive, more socially honest, and more macroeconomically ‘real’ positioning for the economy of the future are you guys.

    But back at the ranch, preparing for a recession or depresion makes a lot of sense right now.

    • Wiley Wolf says:

      Enfilading ??. WW

      • Yes, enfilading, WW. Look it up.

        Thanks HnH and Gunna. We have been so long without a recession it will be a monster when it comes. So many hollow logs, dozy jobs, unproductive enterprises and rent-seeking activities to erase.

        Oooh! And we get a land price correction too.

        Australia lives in fear of an economic downturn, but consider our resilience to bushfire, flood and drought. We have nothing to fear but fear itself.

      • LSWCHP says:

        At last…something I’m actually qualified to comment on here. :-)

        In military terms, having a position in enfilade means being able to direct fire down its long axis (often known as flanking or raking fire) rather than across it’s front. It’s the best way to employ automatic weapons against lines of assaulting infantry for example.

        For additional sweetness, enfilade fire from a defilade position means you have the enemy in enfilade while sheltered from their return fire….the platoon commanders dream.

        I used to be in that line of work a long time ago.

      • AB says:

        “At last…something I’m actually qualified to comment on here.”

        I’m glad you could help because it’s something I’ve never heard of before. I understand the concept but never knew there was a specific term for it.

      • Gunnamatta says:


        Superbly identified trooper. Now we just need people to keep the defilade position occupied without getting themselves pinged whilst myself and a few other assorted fruitcakes work our way around the back. Fixed bayonettes and all, no prisoners.

      • AB says:

        I’m with you Gunna – the politicians and bankers should be first up against the wall when the revolution comes.

      • Prometheus69 says:

        “I’m with you Gunna – the politicians and bankers should be first up against the wall when the revolution comes.”

        Never going to happen. Not in Australia.
        We have an unarmed population for one.
        Secondly … we are far too comfortable and have been lulled to sleep by the mainstream media and its enablers.
        The sheeple of Australia would rather just bitch and whine amongst themselves and maybe hold a token demonstration (a peacefull one of course) and keep voting for the usual clowns in politics.

      • athalone says:

        My commission was between 1974 and 1979.

        At Holsworthy, most of the Gunnas were at 8/12 Medium Regiment.

    • DrBob127 says:

      direct a volley of gunfire along the length of (a target).

      showing a lack of courage or determination; timid.

  5. MJV says:

    Had this exact conversation yesterday, and was naturally met with wry incredulity.

    • kodiak says:

      That hubris needs to be flogged out of people before this is over.

    • lloydie says:

      It’s a gutsy move using the “R” word after 22 years of growth. I don’t disagree with the analysis however. It’s long overdue.

      • athalone says:

        If you take the $50Billion deficit spending per year out of the GDP (Australia) and if you put the huge inflation in property back into the number used as the deflator… we’ve been in Recession for nearly 6 years.

        In that time debt (credit) has increased by 30% across the world.

        Looking forward, historians will say the Greater Depression began in 2008.

    • interested party says:

      You had 4 heads…right?
      Been there, but way early…2007 was my call but was proved early ( not wrong yet ).

  6. briefly says:

    “The Australian economy is now, and will remain so for three years, completely dependent upon rising house prices and consumption for growth. The moment they stall or fall the underlying economic weakness will present itself.”

    An increase in house prices does not add to growth of itself. Pre-GFC, rising prices encouraged households to add to their debts and their consumption. This was not a problem when incomes were growing strongly due to gains in the terms of trade. However, households cannot increase their debts when incomes are stagnating or declining (due to falling terms of trade). As a result, increasing housing prices will soon tend to depress consumption elsewhere in the economy.

    If more household disposable income must be allocated to housing while income growth remains weak (or, as is the case, is falling in per capita terms), then households must reduce their spending on other goods and services or their savings or both. In any case, eventually the rate of increase in house prices must adjust to match the rate of change in incomes.

    As well, thinking of consumption, since we manufacture almost nothing in this economy, the only increase in consumption that will add to growth is the consumption of services. Increased consumption of goods will tend to reduce net exports and detract from growth.

    Of course, the element of service consumption that adds most to growth is construction, especially in housing. But construction products – especially housing – are artificially over-priced. The weakness in construction in spite of the strength in property prices suggests household capacity to pay for more new housing is already at its limit.

    We are approaching that point where the cycle becomes vicious: where rising property prices become self-destroying rather than self-perpetuating.

    If the property market now peaks and households start to lose equity in their houses while their incomes stagnate and the labour market weakens further, then they will try to cut their consumption and increase their savings at the same time the public sector is trying to do the same things. Recession will be absolutely inevitable and irresistible.

    • Pfh007 says:

      Very very well put!

    • China-Bob says:

      As I see it the problem for Australia is that we have yet to start down the path of real structural reforms, reforms akin to those that have been reshaping European and US industry for at least the last 5 years.

      Our politicians and publicum are not even remotely in agreement about whats needed for Australia to prosper. In response we have a business community that’s simply accepting their fate. They signal the lack of control they perceive with reduced Capex and a sit-n-wait approach.

      I suspect that a combination of mining volume increases and house construction will stave off any real recession. Unfortunately this economic distortion just adds to the broader business uncertainty.

      Given the above I’d expect businesses holding weaker hands to simply fold, no trumpets, no fanfares, just lots of redundancies notices and a rationalization of the risks that their capital is exposed too. Basically more of the same grinding attrition that’s currently reshaping our manufacturing base. Personally I doubt we’ll enter the degenerative feedback loop that drives economies into recession, rather we’ll settle for a Japanese lost-generation style solution. In the course of doing everything we can to prop up RE and mining we’ll slowly but surely destroy opportunity and hope within the broader business community.

      Only when that lost-generation process has ran it’s course will we acknowledge the need for real structural reforms, similar to those that have reshaped the US over the last 6 years, of course than we’ll have to correct for at least 20 years of neglect.

      • flawse says:

        ” and haven’t innovated appropriately for their situation with new tools that dramatically lowered the dollar and released pressure on consumers without ramping risk in the housing market.”

        You’re meaning tools that let them get away with crashing interest rates. That’s exactly the sort of ‘solutions ‘ we don’t need.

      • Gunnamatta says:

        But HnH Briefly and China – Bob are right flawse

        crashing rates further is what they will do, as that is the softest possible option.

        The hard option, which you float regularly, will involve far more pain right now…….and our politicians, meda, banks mining and real estate lobbies wont be keen for that.

      • flawse says:

        Yeah Gunna as i post elsewhere I agree. HnH seems to constantly propose it as a solution. It ain’t! As a prediction I’m certain it is correct.

      • athalone says:

        Japan is already a ‘basket case’ with no chance of getting through without default.

      • Jason says:

        rather we’ll settle for a Japanese lost-generation style solution

        I wonder what that will look like. At least the Japanese still make a lot of things.

    • flawse says:

      ” the only increase in consumption that will add to growth is the consumption of services.”

      Good stuff briefly! (P.S. I know you understand this…just making the point) However i think you should have put the word “growth” in inverted commas. If we simply create more ‘services’ we increase consumption without increasing production so it is then ‘growth’ based on increased debt. Nevertheless it is what we mostly use for our ‘growth’ so why change now?

  7. Willy2 says:

    Charts are missing !!!

  8. b_b says:

    I agree – recession is a big call especially given pop growth. But it seems likely we are heading for “muddle through” growth. Mining capex does not need to be offset dollar for dollar by other industries – the multiplier for housing much higher than mining capex.

    But I can see a housing bubble forming for 2015/2016. Rates will stay low, prices will rise more, and supply will accelerate. I have always said relentless increase in supply will be a sure sign of a bubble. But the rba will not be able to help themselves. They need the supply yo keep growth above water.

    • Pfh007 says:

      The supply response – if it happens – will most likely be the result of a lot of people in state and local governments finally making some of the reforms that have been desperately needed for 20 years.

      The clumsy complicated systems that restrict permitted uses of land will be reformed and the restrictions reduced and simplified.

      The hysterical attitude to the financing of new development will improve and we see more government funding of services with higher on going rates or land taxes on the new land to pay OR they will allow private sector financing and recovery from rates.

      Critical reforms long overdue that will start emerging at the same time as the policy herd moves at the same time.

      A very large glass of Metamucil

    • flyingfox says:

      Rates will stay low, prices will rise more, and supply will accelerate. I have always said relentless increase in supply will be a sure sign of a bubble.

      Have seen the rate of new residential towers going up in Melbourne?

      • b_b says:

        The rate of new supply is accelerating everywhere. ABS data below

        The whole “restricted supply” argument is nonsense. The only restriction to supply was price. Now prices are above replacement cost supply is accelerating – the current run-rate is almost 200k! Close to a national record….

        Another 18 months of this and we could be in for one huge correction….Don’t sell yet, but spend the next year getting ready

      • flyingfox says:

        Now prices are above replacement cost

        You do realize that is a circular argument. Bill English, the NZ finance minister gets it.

        and replacement costs for what? Land or houses?

        e current run-rate is almost 200k! Close to a national record….

        So we are close to a bubble but not quite there?

      • b_b says:

        Its not a circular argument at all. That is where a lot of the errors are made.

        Raw land has barely moved in price over the past 15 years. It does not inflated and deflate with house prices which is after assumed.

        That is why we get such strong building cycles. Lots of peaks and troughs. If land increased with prices such that houses were always at “replacement cost” as you seem to suggest, then supply would not be so responsive to change in price.

        But the evidence is that supply responds to price. It is responding now – ABS says dwelling approvals up 25% y-o-y. Run rate supply now 200k per annum.

      • Pfh007 says:


        Raw land ?

        You can’t build on it – thats why it does not suffer volatility.

        It is the restricted permitted uses imposed on land that is at the root of the ‘restricted supply’ that you seem to be in deep denial about.

        You talk about land as though it was fiat currency.

      • flyingfox says:

        @b_b Well depends on how you look at it. It is a circular argument. Cost of housing goes up, it puts pressure on wages. Wages go up, the “replacement costs” go up thereby putting pressure on prices.

        I think Bill English articulated it better than I have.

        We had this discussion briefly yesterday. This leads to the scenario which we are in. Labour share of GDP is falling. Those that got in first in property are enjoying it (essentially a ponzi) whereas the nest gen is asked to take out mega moratgages. This can continue for a long time but only by destroying the value of labour via inflation (of assets, not goods which are tied to Labour costs).

        This is essentially what 2% inflation targeting does.

      • b_b says:

        @ pfh – no you can’t build on raw land. You need serviced land. And serviced land has a “cost of production” of labour, raw materials and input taxes. That is my point about replacement cost – it is not a circular argument as is often suggested. And the data proves my point.

        “Cost of housing goes up, it puts pressure on wages. Wages go up”.

        This narrative simply does not hold up to scrutiny. First, wages share of GDP has been falling for 20 years in the face of rising house prices. Second, wages are not determined by property prices no more than rents are determined by interest rates. If I went to my boss and said I want a 15% wage rise because the RP data index (Sydney) is up 15%, i would not get very far. Neither would a landlord who wants 20% more rent because interest rates moved from 5% to 6%. The tenant would just walk and my boss would probably look for another employee.

      • flyingfox says:

        First, wages share of GDP has been falling for 20 years in the face of rising house prices.

        b_b I am not trying to oversimplify things. Yes there are other factors such as deregulation of banks and credit growth and long mortgages. Therefore I chose my words carefully. “Replacement costs” are mostly are function of labour costs hence wages and developer profit. Therefore in terms of “replacement costs” or serviced land costs, it is a circular argument.

        Second, wages are not determined by property prices no more than rents are determined by interest rates. If I went to my boss and said I want a 15% wage rise because the RP data index (Sydney) is up 15%, i would not get very far. No but if everyone starts going on strike, then the boss might listen. We have had some pretty high pay increases over the past 10 years.

      • Pfh007 says:


        Are you claiming that the cost of new blocks of land are nothing more than raw cost + development cost + margin?

        Could you provide an example of a block of serviced land and subtract the development costs and the raw value of the land (cost as agricultural land) so we can see the margin you are talking about.

        Your claim is that restriction on permitted uses of land do not restrict supply and thus do not affect price.

        Note : Development costs are often inflated as councils seek gold plating of services before they take responsibility for ongoing maintenance.

      • LabDrudge says:

        “Raw land has barely moved in price over the past 15 years…”

        Are you kidding me?

        From the March 2013 Australian Farm Survey Results by the Australian Bureau of Agriculture and Resource Economics and Science (ABARES):

      • Pfh007 says:


        It sounds like he is but b_b is usually quite serious and tenacious in clinging to some of his more unique perspectives. But apart from those blind spots he is usually on the money.

        His ideas about land supply definitely require a white labrador.

        Nice graphs.

        A brilliant effort by our Monetary Policy Cultists to drive up the price of raw land. That takes some determination and bloody mindedness.

  9. Jordan@ABC says:

    Good article HnH – i have no doubt you are right, although i don’t think ‘policy blunders’ change the trend for the economy as much as they aren’t helping

    I also think Japan is a factor too. We’re obsessed with China here (for good reasons) but Japan is an important country for us too, and they are in for a world of pain in the years ahead.

    My latest thoughts on the Aussie economy are here

    bottom line – RBA will be cutting big time in the months and years ahead.

    • flawse says:

      “RBA will be cutting big time in the months and years ahead.”
      I’m presuming that’s a prediction not a recommendation

      It supports China=Bob’s scenario. In the face of difficulty we conduct no reform while doing everything to keep RE prices rising even higher no matter what the cost.
      Jean-Baptiste was so right 200 years ago
      “plus ça change, plus c’est la même chose”

    • Hector says:

      I don’t even think they are “policy blunders” at all.
      They are are bringing on a reset recession. But because of the constraints on the interest rate level (no 17% remotely possible yet)’ they are resorting to other methods, hence the anomalies and contradictions thus far characterising the BCA front government.

  10. Free_Market_Delusion says:

    Thing is it will happen slowly.

    Without an external shock things will wind down ever so slowly.

    At the individual level we won’t really notice and nor will the government until the point comes that its fully realised that a depression has indeed been created.

    There will be no pre planning for it, that I 100% guarantee.

  11. briefly says:

    “RBA will be cutting big time in the months and years ahead.”

    Rate cuts that result in higher housing prices will only make things worse. It may seem counter-intuitive, but under conditions of repressed growth in real disposable incomes, higher housing prices will necessarily drive an increase in savings rates and/or a fall in consumption of other goods and services.

    The problem in this economy is income!!

    Incomes grew very quickly from 2003 til 2008. Leaving aside the disruptions of the GFC, real incomes have been static or falling since Q3/2011. They continue to fall. In the absence of investment to improve productivity, incomes will fall further and faster than they have already.

    It is just not possible for demand and employment to grow for long when real incomes are falling. If households can see their real incomes are going to fall (because of a long-term rise in the cost of an essential – housing) then they will cut their discretionary spending. They will have no choice.

    • Pfh007 says:


      It will be interesting to hear the RBA explain what they are going to do next when this becomes blindingly clear.

      • krazy.galah says:

        They’ll doctor/lie in their analysis to tell us that broadly income is still in line with house price averages over the medium term. They’ll cherry pick this analysis with lots of confusing charts that blind the viewer and convince the MSM.

        Much like they have tried to lie with the cost of new housing to the affordable housing senate submissions in suggesting land prices have not changed. It seems our RBA will do anything to avoid the truth now.

        They’ve failed their charter on economic stability and will cover up this fact as long as is humanly possible.

      • flawse says:

        As I wrote yesterday, for the RBA to admit to policy failure, we all have to admit that the whole tenet of modern economics is BS. I think we will wait a long time for the Professors and academics, who have built their careers on ever more extreme versions of this unrealistic irrational BS, to stand up tall and say “We was wrong!”

  12. The Lorax says:

    BTW, AUD seems to have brushed off those capex numbers. Buy the dips! Taper taper will send it to the moon.

    • flawse says:

      Yup…Then we can really lower interest rates and get this RE boom really red hot nation wide. We need to spread Sydney prosperity!

    • oobles says:

      I’m confused. Taper Taper means dollar to the moon and recession means dolllar to 60c. Do they cancel each other out?

      • flawse says:

        Try again! If you can figure that out oobles you’ll make a fortune on the forex market. Who knows? I guess we are all talking stuff we should be looking out for.

      • flawse says:

        Good question oobles….if you can figure it out you’re about to become fabulously wealthy in the Forex market!

        For my bet, in the face of interst rate cuts, the dollar will fall but not by as much as most hope as Foreign investment which we absolutely love and adore will be snapping up our ‘cheap’ assets.
        Then we have inflation which the RBA will initially ignore but in the end have to start raising rates. They will be way behind the inflation curve (30 years?) and it will escape.

        Edit: That this went missing is my own fault!

      • athalone says:

        The market will crash.
        50% of our equities owned overseas, mostly in US.
        They will sell, then exchange AUDs to USDs to repatriate.
        AUD goes to USD 0.46.
        Au and Ag … Good hedges when all the dreaming is over.

  13. Willy2 says:

    Yes, Abbot & Co. could have played it much more differently. Their decisions are too of a “cold turkey” approach.

    By firing 5000 workers, Quantas firing 5000 workers is – IMO – also playing “hardball”. Perhaps they hope the australian government will give in and help Quantas out with financial support.

    To be fair: Quatas does seem to have a disadvantage compared to foreign airlines.

    • Merk says:

      “Tony, the unions are at the gates! What shall we do?”
      “Let them eat welfare”

    • flyingfox says:

      To be fair: Quatas does seem to have a disadvantage compared to foreign airlines.

      Perhaps. But they are responsible in the majority for much of their decline.

      They weren’t paying attention to the domestic business and let virgin grow essentially unchallenged.

    • flawse says:

      Qantas is the most expensive airline in the world…alongside Air France.

    • StatSailor says:

      Abbot & Co. could have played it much more differently. Their decisions are too of a “cold turkey” approach.

      Agree – they verge on (or maybe just are) reckless with their pursuit of this approach. In its other context, cold turkey is virtually always extremely unpleasant, and has been fatal. At very best it harmful for LNP electability, but more likely to be harmful throughout Australian economy.

      • Willy2 says:

        They could have said: “We’ll give you XXX million dollars but that also means you’ve got to restructure your operations”.

        Same story with the car manufacturers.

  14. firesaleoz says:

    Yes, I sometimes wonder about the big picture.
    I am sure those advising the policy makers & tax rule writers understand very well what is happening and how the system could be made more functional – looking at you Board of Taxation.

    Risk 1: The mining bust.
    At the level of personnel, isn’t it really just a specialist construction bust?
    At the material level, all the mining equipment imported adds to GDP but adds to Trade Deficit as well. With less imported mining related equipment, wouldn’t the Trade Deficit narrow?
    The mining business here is just going to write most stuff down anyway and for what benefit to Aus?
    At the end of the day all the Aus gets in exchange for giving away resources are some exploration fees, royalties (unless the 5 year royalty holiday-fairy wands her wand), PAYE taxes from construction workers (unless they are heavily negative geared) and maybe some company tax (except for perhaps Fortescue Metals).

    Risk 2: Policy blunders. Don’t we have these in spades?
    Some of the main factors here are policies that forced land prices into the troposphere and selling land to foreign buyers rather than some kind of leasing arrangement.
    It is impossible to compete with the cheap labor of Asia, wages are going down long term as services and manufacturing continues its exit.
    Apart from royalties, it is the cash-bearing immigrant and equity-mate investor that give the illusion that we are running at a sustainable profit. Every sale of a multi-million dollar home adds to GDP, even if the owners spent the last 5 years in comas doing nothing.
    GDP is really evidence of inflation in the case of this country.
    Liberals obsession with destruction of the working class will continue, at the same time showering middle-class welfare on the wealthy. The next IED Libs will plant under average income workers ass will be escalating health cover costs following the asset sale of Medicare.
    We all know the reasons for the housing bubble, TBTF Ponzi – if you do not know the reasons, read Senate Inquiry into Affordable Housing submissions by Saul Eslake and Catherine Cashmore.

    Risk 3: China. Agree with your points about trade with China and consequences.
    China, synonymous with FIRE at the state level – offers a glimpse of one of our possible futures. All Aus needs to do is sell off all Commonwealth & other productive assets and it is a done deal – we will be one of their autonomous regions, with incomes to match. China, a single party state, continues its long grind to hoover up resources, land, businesses and politicians around the world. Admit it, they are smarter and actually committed to their own country’s prosperity than most of our elected reps by a country mile.
    Should add, China as FIRE is not much different to other multinational FIRE players, they are just better organised and focussed.
    So, what to do?

    • spleenblatt says:

      a) Give the resource and energy exporting sectors carte blanche
      b) Prop up the FIRE sector
      c) Continue to bastardise your manufacturing and industrial base, defund public services, sell off publicly owned assets, crunch wages and regulation, pull at the threads of the welfare safety net
      d) Espouse the opportunities and challenges of a globalised free market, occasionally concede the game is not actually a level playing field, but pursue an ideologically driven economic approach regardless, while stitching together a decreasingly plausible narrative of what it means to be Australian
      e) Tell your citizens they have had it too good for too long, it’s time for them to start working for a living, but assure them they are not in a race to the bottom
      f) Buy a house
      g) All of the above

      Some of the more hot-headed ethnic countries might add the option of instigating a political movement with a para-military wing which terrorises those complicit in selling out their country, but such people are prone to primitive tribalism and over-sentimentality

  15. briefly says:

    “Admit it, they are smarter and actually committed to their own country’s prosperity than most of our elected reps by a country mile.”

    China’s rulers are committed to their own prosperity and to the use of power for that end. Government in China is a racket in which power is used to suppress opponents, promote supporters and loot all comers. Make no mistake. There is no accountability, merely authority and its privileges.

    • firesaleoz says:

      They have the same self-serving attitude as elect reps here.
      In a way, my post was designed to wind-up paid Laberal hacks reading this blog.
      I like your version better.
      China is still one of our future model.
      Only one thing stands in the way – more on that another day.

  16. Free_Market_Delusion says:

    And yet life goes on, the sun will still shine and the rain will still fall it is what it is.

    Some will have jobs some will not.

    Those in power have to recognise a problem before they can even think of a solution therefore it’s only knee jerk reactions from here on in.

    I no longer worry about things I can do absolutely nothing about, happy to comment on such things but comfortable in my own apathy.

    • flawse says:

      FMD I wish I could arrive at such a state. I guess it is a problem if one has to deal with the stupid reality every hour of every day! :(

      • Free_Market_Delusion says:

        I’m not proud of the state I have arrived at but at some point you have to give up and get on with whatever life throws at you.

        IF I don’t give up I just end up furious and really can’t be bothered with the stress anymore.

        I have been following financial blogs since 2008 and as much as it genuinely fascinates me the bottom line is the world is controlled by vested interests and I cannot change that.

        I think back only 10 years ago when I was 30 and had finished uni and I was so passionate about making a difference as an environmental professional. All that has gone with each job I have had when I realise how the world really works.

      • flawse says:

        Hmm try again

        FMD I’ve been baying at this same moon for 50 years close on. It takes a special kind of madness i guess.

      • AB says:

        @FMD, you summed up my own views perfectly when you expressed yours.

        I’m apathetic and not so proud of it either.

    • Andy! says:

      Hard to be apathetic without a home of my own, when all I see at auctions is those with bags of dodgy overseas money and/or those bloody infestors paying more.

  17. flawse says:

    hehe! One small thing left out of this analysis…dare i say as usual? Or perhaps conveniently?
    Inflation! Please don’t give me tripe about you can’t have inflation in a recession.

    P.S. I tried to post this yesterday but it got swallowed. Some might think it trivial however….
    I’m very fashion conscious so I buy my jeans at ‘Blockers’ aka Lowes. I walked in there yesterday to purchase some jeans shorts. The jeans I buy were $39.00 about 1 year ago. They are now $55.00! Note that previously the weight of the fabric used in the jeans had been dropped by 10% which is the sort of ‘hedonic ‘inflation the ABS cannot pick up but which has been widespread through the economy for decades. We have to run out of wriggle room on quality sacrifice eventually which will only leave price increases. Lowes must have reckoned they’d reached that point on jeans.

    • The Lorax says:

      Lowes are just protecting their margins. Take your business to Big W or KMart where you can buy jeans or shorts for a fraction of that.

      In my experience, the prices of cheap imported manufactured goods has not changed with the fall in the dollar. The imported inflation bogey only exists in your feverish imagination flawse.

      • Peter Fraser says:

        It will come through, but as you point out people can substitute, so the whole rise isn’t passed on.

      • flyingfox says:

        In my experience, the prices of cheap imported manufactured goods has not changed with the fall in the dollar.

        Maybe. But for a lot of things they have. Cars, white goods, electronics. Anecdotal evidence only.

      • flawse says:

        They don’t fit…cut is small to save costs. Fabric is also much lighter.
        “The imported inflation bogey only exists in your feverish imagination flawse”

        Right you’d know so much more than I would Lorax seeing as how I’m just an importer on a reasonably wide variety of products..The idiotic approach is the one you are taking. “There hasn’t been inflation therefore there will be none.”
        Why? Where’s the logic?
        But never mind just ignore evidence I’m sure your opinion is the only one that matters since you are such a rational logical independent thinking individual

      • The Lorax says:

        You’re an importer. Domestic demand is weak and the dollar is down, so your margins get crunched. Tough titties.

        Welcome to the hell that exporters have experienced for a decade now. The difference being exporters are worth saving, importers aren’t.

      • athalone says:

        Some of us still think that inflation is caused by printing too much fiat currency.

        That’s the trouble with being 63 years old…you have long since realised that the common sense test is more important than the textbook.

      • 3d1k says:

        Lorax every now and again you display your true colours, not pretty.

        Importers play an important role in the economy – gee I even reckon your mobile device was imported – we’d never hear the end of your bleating if you were in a similar position. Just as we’ve never heard the end of your export woes.

        Fortunately $value of our exports has been rather strong in recent years ;)

    • Ronin8317 says:

      The $55 jeans will cost less than 1/10th of that to have it landed in Australia. The usual practice for clothing retailers is to multiple the landed cost of the garment by 10 as the retail price. If it went up from $39 to $55, the exchange rate will only account for < $2 of that.

  18. Sweeper says:

    If there is a recession, the RBA is to blame.

    None of their thinking makes any sense. Unemployment is rising, investment demand is weak, the dollar is still way too high – all signs that money is too tight. RBA’s response:.lets remove the easing bias from our statements. That makes no sense at all.

    Secondly interest rates are too high, probably because they are worried about housing. Message to RBA: how will housing look with the country in recession?

    • flawse says:

      “None of their thinking makes any sense. Unemployment is rising, investment demand is weak, the dollar is still way too high – all signs that money is too tight”

      Nope! All signs that money has been too loose for far too long and that our whole economy is devastatingly mis-allocated and our costs way too high.

      • melbourneguy says:


        Sweeper your argument is like saying a cocaine addict needs more cocaine to survive.

        “how will housing look with the country in recession?”

        How will an addict look in rehab? Not great sure but at-least on the path to improving.

      • Sweeper says:


        A growing economy is a healthy economy an economy in recession is an unhealthy economy. I can’t see how a drug addict is a good metaphor for a healthy economy while a sober person is a good metaphor for an economy in recession.

      • flawse says:

        Because your healthy economies appear, or think they are, healthy because they are growing on debt. The drug addict feels pretty good when he’s high. His problem comes when the party is over as does the economic fallout.

        An economy in recession is hopefully an economy in a healing process.

    • Andy! says:

      Too tight? In light of what IS happening and likely to happen here I’d say the policy is way too loose (as it has been since at least 2003). It is wrong on every level that these low rates are being used to push house prices to new records along with crazy borrowing levels. MP tightening is years overdue.

    • athalone says:

      ” how will housing look with the country in recession?”

      Housing will look like a good place to go to when you’ve been too long in the storm.

  19. Explorer says:

    There might not be a recession (2 consecutive qtrs of contraction of GDP) because of the increase in volume of resource exports, even if prices fall (but absent a China crash).

    There will however be some types of employment that will experience 2 consecutive qtrs of contraction in the absence of huge infrastructure and construction spending. This will flow into retail emloyment and discretionary spending.

    In the absence of fiscal stimulus and increasing public debt, the RBA will be obliged to go to ZIRP. ZIRP will increase company profits even as revenue falls because of the fall in interest costs, except for spending on middle class luxuries/discretionary spending. ZIRP will result in a rising stock market because of the search for yield and increase in capitalisation rates/PE multiples even if profits are merely stable rather than growing.

    So what are the chances that the Libs will pursue austerity and that a falling currency will not help because there is so little manufacturing capacity to take advantage of it?

    Given the ideological positions of Abbott and the Libs I expect contraction for 2 years starting in 6 months followed by a huge rush of spending to try to win the election, but after construction industry unions and working conditions have been flogged.

    Drought could turn it into a real recession if it continues for a year or two.

    • Free_Market_Delusion says:

      I like your take on things.

      Strikes a chord with me.

    • China-Bob says:

      @Explorer, Over the last 2 years I’ve tried on three separate occasions to raise capital for what you would probably call a Private Equity takeover.

      The capital I had identified initially was all spent on Sydney housing and they made a very nice profit.

      . On every subsequent occasion it’s been politely explained to me that there is zero investor interest, inside or outside Australia, for any new industrial/manufacturing projects. I guess the truth is that since mining capex decline started investors actually want to reduce their exposure to the sector (creating negative interest…if you like)

      IMHO It will be impossible to create any interest for any new Aussie Manufacturing venture until the economy stabilizes again. Based on the duration of the US/European recessions it will take 3 to 5 years. Mark my words if we have a recession it wont be a V shaped recession, my expectation is for 5 years of stagnation with every possible lever being pulled to stave off economic retraction.

    • athalone says:

      Come on Explorer what about the P in GDP.

      The economy borrows extra-ordinary amounts of money to increase the price of houses… And that’s counted as product?

      The federal government deficit spends 3.3% of GDP to get 3.2% GDP?

      Housing inflation is 15% per year but isn’t even included in the inflation number as deflator?

      We’ve been in recession since 2008.

      Don’t get fooled again…

  20. flawse says:

    Complements of zero hedge

    A monetary policy dedicated to averting credit defaults by all means would speak for a fairly tough scenario going forward: depression preceded by inflation. This is a scenario quite similar to what happened, for instance, in the fiat money inflation in eighteenth-century France.

    ‘According to Andrew Dickson White, France issued paper money seeking a remedy for a comparatively small evil in an evil infinitely more dangerous. To cure a disease temporary in its character, a corrosive poison was administered, which ate out the vitals of French prosperity.
    It progressed according to a law in social physics which we may call the “law of accelerating issue and depreciation.” It was comparatively easy to refrain from the first issue; it was exceedingly difficult to refrain from the second; to refrain from the third and with those following was practically impossible.
    It brought … commerce and manufactures, the mercantile interest, the agricultural interest, to ruin. It brought on these the same destruction which would come to a Hollander opening the dykes of the sea to irrigate his garden in a dry summer.
    It ended in the complete financial, moral and political prostration of France — a prostration from which only a Napoleon could raise it.

    • nqdave says:


      You must has missed the memo…

      Time is linear and history doesn’t matter. The whys and wherefores of past crises are irrelevant to the more-evolved modern society. History is what happened to to the Neanderthals.


      • flawse says:

        :) Thanks Dave

      • athalone says:

        Be careful Dave… the United States of America defaulted as recently as 2013 when they didn’t have the wherewithal to return a paltry 300 tonnes of gold to Germany, saying it would take them seven years to complete the request.

        What do you think will happen when foreign central banks no longer wish to roll over their US$5.795Trillion in US
        Treasury Bills, T-Bonds and Notes?

  21. interested party says:

    A recession is all but guaranteed. Since 2008 the rest of the developed world has had this visited on them, some are in denial on this, but all the same they have suffered. I cannot name one country that has ‘honestly’ grown out from under it. They obfuscate the reality with ‘hedonic’ measurements and “when things are bad sometimes you have to lie”.
    We have delayed our inevitable recession courtesy of China going all in……that is ending as we speak( or very likely).
    So….Europe is not fixed or growing.
    The US is on a drip feed……it is not growing.
    Japan…well, what do you say…..they are creative at least.
    China is a wild card…….outcome unknown
    Mid east is simmering on the back burner…has not gone away
    Russia is a wild card…good for growth in defence..

    The take away here is that we cannot grow ourselves out of this via internal consumption…we need to export our way out of it; but to whom…..and with what sector…the countries above are not our friends here. They are our competitors in a shrinking market…AND most if not all of the world is BROKE. Growth, or more honestly ‘exponential growth’ as we live with, is over until we digest the last 60 years of industrial living, debt accumulation, and bastardized economic beliefs from our financial high priests. The whole system is in dire need of a purge, and maybe this is on it’s way. Some may welcome this outcome but I for one have a healthy fear of what may be coming. This will go hand in hand with an oil shock if my guess is correct, and as our society ‘runs’ on oil all bets are off on how bad this could really get.
    To prepare and be wrong is an acceptable outcome for me. Not to prepare and be right is foolhardy in the extreme.

    • Janet says:

      Top post, finished of by the best advice in that final sentence that anyone could want to consider. Thx.

      • interested party says:

        No problems Janet.I cannot keep up with most of the crew here regarding the finer points of economics so I try to see the big picture and share my thoughts. Really happy to be proven wrong at all times though… the post above.

      • flawse says:

        Wrong? Nothing wrong with a clear headed warning that there are indeed rocks in our path!

    • Free_Market_Delusion says:

      Couldn’t agree more!

      As pessimistic as I am I can only control so far as to have some kind of buffer if/when things go bad.

      But buggered if I’m putting life on hold waiting for the sky to fall in.

      • interested party says:

        Never said the sky was falling in…just sharing my thoughts from a higher perspective than the local view. We can sometimes get caught up in the ‘noise’ of policy tweaks and adjustments and miss the big picture.
        I run my own business and I run “what if” scenarios often to minimize risk that may come out of the blue, but are totally avoidable when planned for/against. This is what I mean by preparing.
        The sun will still come up tomorrow regardless, I just hope to enjoy it as best I can.

    • flyingfox says:

      +1. Great post.

      The biggest issue I have with current economic thought is that the people are a very small part of it. Current trends in demographics almost guarantee the scenario you have pointed out.

      • interested party says:

        Yep, baked in from my perspective. The link you give is another angle again, and will exacerbate the problems entirely.
        For the life of me I cannot see a way to avoid this predicament….and that is the correct term. Problems have solutions…..Predicaments have outcomes. Big difference…and we are treating it as a problem. There is no answer imho.

      • jim from qld says:

        I love (or is it hate?) that slide FF. It proves that demographics are the real game in town. The demographic compositions of the major economies are flashing red, all economic modeling is based on the assumption that the growth in the last half of the 20th century is normal. We are only now realising that the economic growth was only partly driven by technology and the rest was driven by the mother of all demographic dividends. Sadly that mother is now a grandmother and her age pension is coming home to roost.

      • flyingfox says:

        @jim Well put. This cannot continue. On the plus side, the system that is in place is actually leading to smaller populations.

        A lot of the conversations on MB have focused on 1-50 year time scales but the past 50 years or 100 years or 200 years have been unlike anything in the history of the world.

        I agree with Keynes, that in the long run, we as individuals are all dead. But what about we as a species?

        I am hopeful though, that in my lifetime, I might see some changes.

    • surfbeach2536 says:

      So how do you really prepare for such a scenario, where could we escape to?

      • interested party says:

        There is no real escape as it is global….it is not a local event. Pick a country that has fallen into recession during/since the GFC started and see how things have changed in that country. People still live quite happily, some struggle with change…..but most will fall to a lower standard of living. Your personal outlook on life will determine how much you are affected by it.
        You can riot and chuck rocks…..or sit back and grow veggies….the sun will still rise the next day.

  22. Hugh Akston says:

    Maybe we’ll be able to get rid of you bloodsucking vampires during the shakeout. Policy blunders my arse!

  23. migtronix says:

    And to the rest of Australia you guys talking recession wear shiny, crinkly hats – it’s all a matter of reference I suppose.

  24. greebly24 says:

    A lot of excellent comments from people who obviously have a far greater understanding of economics than I do.

    However, I think a US-China war is inevitable, and will occur before a global financial collapse.

  25. skimaster says:

    There must be a way through although its been 30 years since Australia’s last recession. Perhaps NZ is worth a look as it must be doing something right.
    Business confidence there is at an all time high. Australian migration to New Zealand is markedly increasing. Interest rates there are to go up in March. AirNZ has just posted a thumping profit. The country is almost in surplus.

    • rich42 says:

      What NZ did right was NOT have a resource boom; so it didn’t have the opportunity to make blindingly stupid decisions.

    • md says:

      The big difference is that the NZ govt and RBNZ were prepared to acknowledge that a housing bubble needs action. Our government and RBA have only taken action to inflate our bubble. They don’t see any problem with that.