From Chris Joye today:
This brings me to the next Australian recession. While nobody knows when it might arrive, it will happen eventually. And now is the time to think about triggers and business models that might thrive in an adverse climate.
One proposed to me by the 12 analysts at the $10 billion equities shop, JCP, is a negative change in credit outstanding. Since 1976 the only occasion that growth in total private sector credit outstanding has gone negative for more than two quarters (rolling monthly) was 1991, which unsurprisingly coincided with our last recession. JCP projects that while the RBA will cut the cash rate once more to 1.75 per cent, it will begin a slow normalisation process in 2017 with the cash rate peaking at a modest 3.75 per cent in 2022. This will precipitate overdue and sustained household deleveraging that will force a protracted contraction in credit outstanding for a five-year period.
Half a decade of negative credit growth coinciding with declining house prices and rising arrears (JCP concurs with Goldmans) would be bad news for the big banks, which could report their first losses since 1991. This is precisely why they should be building capital buffers today while naive equity investors presume a recessionary credit crunch will never materialise.
True enough except for one thing. The recession will be here in 2017 and will happen despite interest rates falling to 0.75% as an historic reversion to mean in the terms of trade combines with the mining capex cliff, shuttering car industry, residential construction downturn, as well as a probable global shock as China slows and the Fed hikes rates.
