Yes We Have No Recessions
There has been an undercurrent of gloom in media reporting over the past few months, spurred on by some very real global and domestic risks and economic headwinds. We have mentioned these in one of our recent blog posts.
OECD forecasts a reduction in GDP growth “…to around 3.5% in 2019 and 2020”, with growth forecasts being revised down at the end of November 2018 for most of the world’s major economies.
And whilst US/China trade wars and exchange rate movements are yet to really show the true impact on economic activity, it is worth noting that Australia has some resilience to recessions, with some data to show why.
By definition, a recession is two consecutive quarters of negative economic growth – or basically a shrinking of the economic pie.
A recent analysis of Australia’s economic data to June 2018 by IBISWorld founder Phil Ruthven has highlighted that our consumption and export patterns are fairly stable and constitute approx. 80% of our economic pie, with the remainder being capital expenditure. In fact, according to IBISWorld, consumption has not had negative growth in six decades. Similarly exports have consistently grown since 2005.
The real variation is in gross capital expenditure (both private and public) – where the last six recessions have proceeded a drop in capital expenditure of 9% or more. In the current climate of business and government capital expenditure this is unlikely to happen in 2019 (and successive state and federal government elections in 2018 and 2019 will ensure this is the case).
There is however, the impact of a drop in housing prices and a reduction in housing construction to consider. With dwelling capital expenditure accounting for 30% of the overall capital spend, a downturn in this sector will have an impact on growth and the economy. But we must remember that construction is somewhat reduced – it hasn’t stopped altogether. And residential construction has slowed, but in some capital cities this reduction is small.
Of course, this economic resilience is not always comfort for many households that have a flat or declining discretionary income, little or no wages growth, price increases in food and utilities and significant debt repayments. It is most likely that for the next 2 – 3 years household spending will be tightly contained.
But recessions are when businesses simply “close up shop” and disappear, and when new investment dries up. This is unlikely to happen in Australia for some time.
Life will remain somewhat restrictive, but we are far from recession territory.
Instead business owners should focus on fortifying their profit margins, seeking growth from existing markets and being innovative. This period is best focused on being ready for the next growth phase and having the right strategies to take advantage of future growth.
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