Aussie Economy 26-Year ‘Miracle’ to End in 2016?

It has been more than 26 years since the last Australian recession.

The period of economic growth has lasted longer than most thought possible.

But can this growth last forever?

If no one expected it to last 26 years, who’s to say it can’t last 36 or 46 years…or even longer?

It’s not impossible. But it’s not likely. In fact, we wouldn’t be surprised if Australia’s economic growth streak ended before the year was out.

Here’s why…

For a long time, folks have viewed Australia as an economic miracle.

While many countries suffered a severe economic collapse in 2008 and 2009, Australia didn’t.

Many countries saw unemployment rates soar. Australia didn’t.

Many countries had to cut interest rates to records lows…and then keep them there. Australia cut rates initially, but then increased them as things improved.

But that’s history. Things have changed. Australia is no longer an economic miracle.

Debt for growth

Here’s the giveaway that the Aussie economy is in more than a spot of bother.

As the Age reports:

Reserve Bank governor Glenn Stevens has used his farewell speech to implore the Turnbull government to take on more debt, saying that rate cuts alone can no longer “dial up the growth we need.”

And for what purpose does Mr Stevens recommend increasing government debt? The report continues:

Let me be clear that I am not advocating an increase in deficit financing of day-to-day government spending…

The case for governments being prepared to borrow for the right investment assets — long-lived assets that yield an economic returns — does not extend to borrowing to pay pensions, welfare and routine government expenses, other than under the most exceptional circumstances.

Understand that.

An economy in a strong growth position — one that can withstand whatever the world throws at it — is not an economy that should need an increase in government debt.

By now, if the bureaucratic and political arguments for stimulus spending in 2008 were right, Australia should be as far away from the possibility of a recession as you can get.

But that’s not how it is.

The Australian federal government is in debt to the tune of $431.5 billion. How much more debt does Mr Stevens think Australians should take on?

Surely $431.5 billion is enough to lift and economy out of the clutches of recession.

Unfortunately not.

It didn’t work the first time, so try again…

This should be a clear sign for you that things are getting worse rather than better.

Why else would the Reserve Bank of Australia encourage increased government spending — on infrastructure of all things?

Mr Stevens makes a distinction between ‘day-to-day’ spending and borrowing to invest in the ‘right investment assets’.

Our assumption is that Mr Stevens is referring to infrastructure. However, where does the investment in infrastructure end? Is he suggesting that the government should borrow to invest in infrastructure?

If so, what about the ongoing maintenance and servicing costs associated with infrastructure spending?

Remember, once built, any infrastructure investment is a devaluing asset. It suffers from wear and tear and the cost of maintenance.

Could a government finance these costs through debt?

The bottom line to all this is that the stimulus spending from 2008 onwards has finally worn off.

It should be clear enough that artificial stimulus and spending doesn’t work. We’re sure it’s clear for the majority of the population.

Unfortunately, it’s not clear to those in power. If it was, the RBA wouldn’t be in the process of initiating a new stimulus package.

We’ve warned for some time that a recession is on the way for Aussie investors. It appears that the Aussie recession is now more than ever a matter of ‘when’ and not ‘if’.


From the Port Phillip Publishing Library

Special Report: The ‘41.22 Moment’: From September 1929 to June 1932, the US Dow Jones Industrial Average fell 89%. It was the biggest stock market price collapse in financial history. But if you were smart enough to BUY in 1932, after the Dow hit its ultimate low at 41.22, it would’ve been a legacy-making decision for you and your family. Never since has there been a buying opportunity of this magnitude — until now…[more]

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Fat Tail Investment Research, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

Money Morning Australia