Gerard Minack outlines Oz recession risk

By Leith van Onselen

If you get a spare 12 minutes today, make sure you watch the above excellent interview from ABC’s The Business with former Morgan Stanley chief economist, Gerard Minack, outlining Australia’s recession risks.

Like MB, Minack does not believe a recession is likely this year, but believes the risk of recession is high for 2016-17 owing to:

  1. declining mining capex;
  2. closure of the car assembly industry; and
  3. slowing housing market.

“Well the big issue for employment, going forward and looking to 2017, is firstly the capex decline is going to accelerate.

We know that from ABS (Australian Bureau of Statistics) data, but we’ve known that for a long time just looking at the schedule of big projects.

Secondly we’ve got the car industry shutting down. That risk that would occur this year’s been postponed by some Government hand outs.

Thirdly, it’s not clear to me that the residential sector, that’s clearly been an important contributor to employment this year, will be able to sustain that growth into next year.

And on the other hand, we can’t see the offsets coming through yet…

I’d actually be quite surprised if we avoided recession given the size of the adjustment we have to go through over the next three or four years.

Australia’s not ending a once in a generation boom. It’s ending a once in a century boom.

And the two real facets of that were firstly, the rise in the terms of trade now they are already well off their peak and we’re heading back towards more normal levels.

The second part of it that, in an historical context was even more unprecedented, was the boom in mining-related capex.

Historically, since World War Two, that’s averaged about two [percentage] points of GDP (Gross Domestic Product), in this cycle it got to over seven points and we’re only just starting the decline now.

So we will be exceptionally vulnerable for the next three, four years as we normalise these measures.

I think it will not take much of a shock to tip us over”.

Minack also shares our skepticism over real GDP as a broad indicator of economic health, and instead believes analysts should focus on real national income, which has been falling since late-2011 in per capita terms:

“…the bigger issue is when you look at say the GDP data we had this week- he can focus on the 0.9 [per cent quarterly growth] and say that looks fairly good, but you’ve got to appreciate just how misleading GDP is in this cycle, and how misleading it was in the boom.

The boom and the threat of a bust is all about the terms of trade. And real GDP at the moment is very low calorie growth.

Yes it’s driven by mining export volumes but the price of the stuff is falling. So export receipts are actually declining. So it’s making no contribution to income.

In addition employment – it hires no, almost, no one. In fact they’re firing at the moment so we’re not getting any income boosts from it, we’re not getting any jobs growth from it.

Statistically it adds to real GDP, but it’s just not the metric to focus on and, the metric to focus on is domestic income. That remains exceptionally weak and that keeps alive the risk of recession”.

Minack also sees housing as “a huge macro risk”:

“When we have one of the most levered households in the world with clearly one of the most expensive housing stocks and what we have seen persistently through the last two decades is where you have seen job losses and of course they’ve only been localised because we haven’t had a recession in 25 years.

But where you’ve seen job losses, you’ve seen double digit house price declines so if we get job losses across the economy I’d be staggered if we didn’t see double digit house price declines.

And all the tensions and stress that that would create and what have we achieved by letting house prices get this high? Nothing!”

And he believes that the RBA/APRA should have imposed macro-prudential controls on mortgage lending years ago, but that the horse has probably bolted now:

“It would also have been helpful to introduce some of the macro-prudential measures that are now being discussed, four or five years ago. Because clearly one of the concerns the RBA has about these low rates, or cutting them further, is the impact on housing or house prices.

Now, we could have reduced that risk by introducing more sensible macro-prudential measures five years ago, [but] that’s water under the bridge. I guess we can try and bring them in now. But it’s maybe too late”.

Overall, and excellent interview by one of the few Australian economists that understands the economy’s predicament.

[email protected]

Unconventional Economist
Latest posts by Unconventional Economist (see all)


  1. It’s never, too late.
    Why do we think Macrotools weren’t brought in 4 or 5 years ago, when they absolutely should have been and accompanied by a quick slash-and-burn on % rates? Because back then there was a feeling that ‘it’s too late; that we would upset the apple cart if we did anything now. Let’s just see how it plays out”. Well guess what?! It’ wasn’t too late, back then, and it’s not too late right now. Sure the fallout will be worse than it should have been, but far less than it will be unless someone has the courage of carpe diem. Waiting any longer is the bit that it’s too late for……

    • Well quite a few banks will be adopting the new macro rules from tomorrow. Lets see what happens. I think they are tightening too quickly and it will become pro cyclical.

      • Yep, now the hot money will flow into ASX small cap stocks, watch the bubble bubble !!

    • How could MP possibly be desired by RBA 5 years ago when their stated explicit target was house price inflation to stimulate the construction industry? It was a very conscious decision by RBA to rubbish / ignore MP, for the simple fact it was in opposition to their goal.

  2. The Patrician

    Poor old Gerard. He needs to cheer up and invest in housing.
    Another loser crashnik who missed the boat
    Calling it for years and it never came.

  3. too late for anyone to listen, things will play-out the way it has to and no politician or policy can change that much.

    we are heading into the wall, we are so close so it’s too late to apply brakes

  4. Pardon my ignorance but anyone who has borrowed at record low interest rates recently would essentially become the “greatest fools” if MP were installed now?

    So what happens when the greatest fools have been found?

    Btw, AUD 25-40 cents to usd in next 5 years… Australia is going to get caught with only their dicks in their hands come late 2016…

  5. “And all the tensions and stress that that would create and what have we achieved by letting house prices get this high? Nothing!””

    Politicians achieved their own goals of making the economy “appear” stronger and boosting their chances of being re-elected.

    Howard and Costello really set the thing in motion there. Deliberately.

  6. Good video apart from 9:35, “a world of excess saving”.
    What F’ing world is he living in!

    We have so much savings that nobody can afford to pay back the debt – go figure!