Is Australia Really Recession Proof ?

Australia has a peculiar economic history amongst the developed nations. Whereas all other developed countries have faced some economic downturn in the past few years, Australia has avoided recession for 25 years now! This is a record of sorts wherein a developed economy has been continually growing for such a long period of time.

The international community defines a recession as being two consecutive quarters when an economy registers negative growth. Australia has had one incident of negative growth in over a hundred quarters fuelling speculations about its infallibility.

This had led to several types of speculations. Some believe that the Australian economy is rooted in agriculture and other natural resources and hence cannot face recession since these industries are recession-proof. Others feel that since the recession has not happened for so long, it is waiting to happen any moment. Based on which point of view one believes in, the future of Australia’s economy appears very different.

In this article, we will reconsider the possibility that Australia may be staring at a recession in the near future.

China’s Supplier

The past couple of decades has seen a major shift in the Australian economic structure. The Australian economy was earlier largely based on agriculture. Australia was a land of pardoned convicts who now controlled endless swathes of cultivable land. This was before the mining boom in Western Australia. Australian’s soon discovered that they had a wealth of minerals buried deep in their grounds. Also, they found that there is a huge demand for these minerals in China which was undergoing the construction boom of the century.

Fuelled by China’s insatiable demand for minerals, the Australian economy expanded all of a sudden. The modern Australian economy is largely dependent on China with the latter accounting for 35% of all exports made by Australia!

The End of the Mining Boom

The robust support from Chinese economy meant that Australia was able to wither the 2008 storm without any major hassles. While the global economy was reeling, China had created a stimulus package to ensure that its economy kept booming. This had spillover effects on the Australian economy which was a major trading partner with China.

However, since 2015, it seems like the Chinese economy is in the doldrums. As a result, Australia’s infallible economy is also suddenly appearing to be extremely flawed.

China is used to digging stuff out of the ground and selling it to beat the recession. However, this time, the buyers may seem hard to come by. The results have already been seeing in the declining commodity prices prompting economic pundits to uphold their negative outlook for the Australian economy.

Property Bubble

The Australian housing market is also in the middle of a massive housing bubble. Many economists believe that the property valuations in major urban areas such as Sydney have become unsustainable.

They claim Sydney may be the most overvalued real estate market apart from the notable exception of Hong Kong. This property bubble has also been created by the influx of foreign investors.

Chinese money has flooded the Australian property markets and raised the property rates so high that locals cannot afford to buy these properties. This overheated market may also be looking at a 40% correction. This would be a huge blow to the Australian economy since housing sector is the third largest employment provider after agriculture and mining.

Deregulation

To make matters worse, Australian central bank has progressively deregulated the Australian markets. This means that the governments have no control over important metrics like the exchange rate. Under normal circumstances, this is good for the economy.

However, in the Australian context, the economy does not have any shelter from market attacks. When the trade with China slows down, Australia may be open to attacks by Forex traders. In the absence of government intervention, they could drag the Australian dollar down considerably.

Powerful investors like George Soros have a negative outlook on the Australian markets and are looking to take advantage of the situation.

Credit Binge and Aging Workforce

Australia’s last stand, the working population is also under strain. Firstly, conspicuous consumption has become the norm. Australians have become the most indebted bunch of people in the entire world.

Their household debt has risen from 25% of GDP to 125% of GDP within the past 50 years. This means that there is no chance they can borrow more to sustain increased period of consumption that can drive growth higher. In fact, they are likely to cut consumption as soon as the outlook turns negative and this may spark a downward spiral.

Australia also has a huge demographic problem. It has about 800 people retiring every hour and not as many people are joining the workplace.

In fact with increasing automation, even with lesser people around, getting a job has become very difficult. Australia, therefore, has 3.4 workers per retiree today as compared to 7.7 five decades ago. This number is expected to drop further. Hence, as long as taxes are not raised, the Australian government is going to face a shortfall.

All these factors when added up together create a formidable challenge for the Australian economy. The recession-proof economy may be put to the test very soon, and until Australian government has a backup plan, a crippling recession seems to be on the cards for Australia.