Goldman Sachs’ chief economist for Australia, Tim Toohey, has given Australia a one-in-three chance of experiencing a recession over the next 12 months if slumping business investment coincides with falling dwelling construction. From The AFR:
Weak commodity prices, sharply declining business investment, excess labour market capacity, falling profits and incomes, and ongoing government spending cuts will continue to drag on economic growth…
Chief economist Tim Toohey and his team believe the economy will expand just 2 per cent 2016 – which is at the bottom of the Reserve Bank’s forecast 2-3 per cent forecast range and well short of Federal government expectations.
…[But] the prospect of a 15 per cent plunge in business investment and fears that dwelling investment has peaked suggests “a recession is not some remote probability,” Mr Toohey said.
“It currently stands at the greatest probability since the financial crisis.”
Toohey goes on to argue that any recession would be shallow because rising export volumes, particularly around LNG, would boost real GDP.
Overall, I agree with Toohey’s assessment. The export volumes boom, not to mention ongoing solid (albeit falling) population growth, makes it difficult for Australia to experience a technical recession of two consecutive quarterly falls in real GDP.
But this is besides the point. Australia will very likely be selling more goods (e.g. iron ore and LNG) at lower prices and for less profit. Therefore living standards, measured on a per capita basis, will still fall.
Moreover, as the spate of mining projects are completed – e.g. the six LNG plants and the Roy Hill iron ore mine – mining-related employment will necessarily shrink. When combined with the unwinding of dwelling construction from next year, and the closure of the car industry, this means that the unemployment rate will rise, potentially by several percent.
With falling national income and rising unemployment, it will feel like a recession, even if one is not technically forthcoming.
