AMP Capital’s chief economist, Shane Oliver, has published a research note giving seven reasons why the Australian economy will avoid recession, “although economic growth is likely to slow sharply from 3% this year to around 1.5% next year”.
1) Australia’s business investment outlook is solid:
According to Oliver, “the ABS capital spending intentions survey is up about 15% on a year ago”, with “real business investment expected to grow by around 5% over the year ahead”:
2) Housing construction will remain robust:
Oliver notes that while dwelling approvals and new home sales have fallen sharply, the dwelling construction pipeline is at record levels due to delays from the HomeBuilder stimulus. Therefore, construction activity should remain strong next year:
3) National income is being boosted by high energy prices:
Oliver argues that high energy prices are boosting national income via the earnings of energy companies, which have also boosted the federal budget (via company tax receipts).
I counter that these energy companies are 95% foreign owned and the earnings have flowed offshore, as illustrated by the below ABS chart:
Moreover, this ‘boost’ to government revenues has come at the expense of households, whose disposable income has shrunk, offsetting the benefits.
4) Australian dollar will plunge if global recession hits:
Shane Oliver argues that the Australian dollar would falls sharply if the world enters recession and commodity prices tank. This devaluation would, in turn, make Australia’s exports more competitive “as it did in the Asian crisis, tech wreck and the GFC”, thereby supporting growth.
5) Immigration boom will support growth:
Shane Oliver notes that immigration is rebounding sharply, which “will help ease the labour shortage and tight jobs market” and “will help head off a surge in wages growth to levels well beyond those consistent with the inflation target”.
Of all the reasons why Australia will avoid recession, I believe this is the strongest.
When immigration (population growth) is running hot, it is much harder for Australia to experience a technical recession because more inputs in people means more outputs in GDP.
This is why Australia dodged recession between the early-1990s and the pandemic, despite experiencing several per capita recessions whereby the economy shrank in per person terms.
Record immigration next year will probably ensure that Australia’s economic pie grows in aggregate terms, even if everyone’s share of the pie shrinks.
6) Inflation is less of a problem in Australia:
Shane Oliver believes inflation is less of a problem in Australia because:
- Australian wage growth is far lower than other nations.
- Our energy prices, although high, are lower than Europe.
- Longer-term inflation expectations are still consistent with the inflation target.
- Australia’s labour force participation is above pre-pandemic levels and the return of immigrants will ease worker shortages.
- The global economic slowdown will reduce inflationary pressures in Australia, reducing the need for the RBA to tighten.
- US upstream price pressures are slowing.
7) The RBA won’t need to hike rates as far:
Because of the above factors, and the fact that the RBA has slowed the pace of rate hikes down to better assess their lagged impact, Oliver believes that RBA won’t need to hike rates much further.
Obviously, if the RBA continues to hike rates aggressively, as predicted by Westpac, Goldman Sachs, the futures market, and some others, then the risks of recession will grow.
