The time has come to call a spade a spade. Australia is headed into recession in the next twelve to eighteen months. It may not technically meet the criteria of two successive quarters of negative growth (though the chances are increasing fast) given the large net exports uplift from commodity volumes but it’s not going to matter on the ground.
Today’s ABS private capex survey is the end of the line. It is signalling a 2-4% fall in private business investment in 2015/16:
Capex drives jobs. Unemployment is going to rise, more than official forecasts.
The Budget is going to miss badly again. Nominal growth faces an oncoming gale and the government has not priced a capex cliff this steep or large. When iron ore goes again, Australia must face the very real risk of the AAA rating being stripped within the next year, delivering another blow to sentiment. That will prevent the government from doing what it should be doing which is preparing a large public works pipeline.
Interest rates are going to keep falling and fast. This survey suggests at least two more cuts this year. And more again next year. They’re simply not working to boost economic activity, and won’t, except to lower the dollar and improve competitiveness but that takes years to show results.
The property market is thus facing extreme forces from opposite directions. It’s impossible to know when it will break with macroprudential, slowing immigration, a Western Australian economic black hole and waves of supply vying with rate cuts. What we can say is that property will be floating on sentiment alone and as economic fundamentals deteriorate at some point it is going to bust. That could be before or after the next global shock but I do not recommend hanging around in an illiquid asset class to find out.
Bonds are going to rally hard, especially at the short end and the Australian dollar will keep falling. Dollar exposed industrials are now the only place to hold money in the ASX.
Position now, peeps, the great Australian bust is lurching towards us.
