Countdown to Australia’s First Recession in 26 Years

The government has 21 days left to avoid triggering the official definition of a recession.

Two strikes — in other words, two negative quarters — and you are out of the economic growth game.

The GDP number for the September quarter was a paltry minus 0.5%.

However, this rather ‘neither here nor there’ number was enough to whip up a frenzy about the need for growth.

With the end of the December quarter only three weeks away, the government will be hoping and/or spending like crazy to avoid a repeat of September’s negative number.

When asked about the modestly shrinking economy during a radio interview on Thursday, Prime Minister Turnbull’s response was ‘This is a bump in the road. But we’ve got to make sure, it’s up to us whether it’s a pothole or a cliff I suppose.

The predictable and programmed response to softer than expected economic data is ‘spend more on…[insert into this space whatever your pet project is]’.

OK, good theory; but what about the ‘practice’ part?

According to an ABC News report on 21 November 2016:

Treasurer Scott Morrison’s budget is facing significant deterioration, with a private forecast tipping bigger-than-expected deficits over the next four years.

The closely-watched budget monitor from Deloitte Access Economics predicted this year’s deficit would blow out by $3.4 billion to $40.5 billion, and $24 billion over the forward estimates.

If the federal government is already facing a budget blowout, how does a fiscally-prudent Treasury embark on a spending spree with money it doesn’t have?

More debt? With government bond rates moving up in recent times, more debt eventually means more interest servicing costs, which means more budget pressure. Sounds like a Catch-22 to me.

In all the economic commentary I’ve read about the weaker-than-expected numbers, no one has tackled the real long-term challenge our economy faces.

Everyone is focused on how to ‘window dress’ the numbers into the positive, while ignoring the erosion that’s occurring to the foundations of not just our economy, but the global economy as well.

The chart below is a couple of years old, but the story remains the same.

Prior to 1980, a dollar of debt generated a dollar of economic output. The purple (debt in US dollars) and dotted (world GDP) lines operated in tandem.

Since 1990, debt in US dollar terms has mushroomed, yet GDP (economic output) has not followed suit.

It is now taking at least $3 of debt to generate $1 of economic output.

credit market

[Click to enlarge]

The story is the same in Australia.

Avoiding a recession over the past 25 years has not been the great economic achievement we are led to believe. Australians have simply gone deeper and deeper into debt. The combination of rising wages and falling interest rates is the ‘secret’ of our economic success.

The willingness to ‘hock ourselves to the eyeballs’ has earned Australian households the dubious (and shameful) honour of being the most indebted in the world. Our political leaders gloat internationally about our ‘miracle’ economy. On that point I agree…it’s a miracle we have not yet self-destructed.

That time, I suspect, is fast approaching.

Which gets me to the ‘root cause’ of the enormous headwinds we in the Western world are facing.

If you believe in, or even entertain, the notion that the unparalleled (with any other time in history) accumulation of debt has been a major contributor to economic and asset price growth in recent decades, then, by extension, future growth is dependent upon more (and more and more) of the same debt elixir.

To be eligible for a loan (debt), you require an income. No one (or at least no one with an IQ above 40) will lend you money if you do not have the capacity to repay that money.

The US economy is the largest in the world. With an economy that relies on nearly 70% of household expenditure, US household spending matters.

household consumption

Source: World Bank
[Click to enlarge]

The Wharton School of the University of Pennsylvania published a public policy article, on 6 December 2016, titled ‘Why the Coming Jobs Crisis Is Bigger Than You Think. Accompanying the article is a recorded interview with venture capitalist Art Bilger, founder of WorkingNation.

The article and interview are well worth your time; you can access it by clicking here.

This was the question Art Bilger posed to former US Treasury Secretary Larry Summers at a dinner in New York three years ago:

“We’re talking about a third of the population that doesn’t have the skills for the jobs of today, let alone the jobs of 10, 20, 30 years from now.” And then, I said, “And to compound it, we’re doing something extremely well, putting aside cost, and that’s longevity.” So I said, “Here’s the math: A third of the population drops out at 15 and we keep them alive to 85. What do you do?”

Bilger then went on to say:

When I posed the question, I narrowed it down to basically just education and longevity. But then you add to that [the impact of] globalization. Put a billion people into the global workforce at lower price points than we work for here. Great for the globe, not so good for jobs here …So, when you take globalization, technology, longevity and broken education, put those four together…the slope of the curve [based on the] change in jobs and skills measured against time has never been as steep as it is today. Matter of fact, we don’t even understand how steep it really is. And that’s the issue.

Readers of The Gowdie Letter and Gowdie Family Wealth will be very familiar with this line of reasoning. It goes to the core of why I believe deflation is in our future.

Without well-paying jobs, it is not possible to secure lending. Without the capacity for the broader community to borrow, the driver of economic growth over the past three decades is gone.

And if you think it is only the unskilled in the firing line, think again.

You are talking about a dramatic change in employment in this country… It’s not just about the bottom 20%. This is about the lower-middle class, the middle-middle class, the upper-middle class.

Bilger cites an Oxford study that estimates the employment carnage could result in the loss of 47% of jobs over the next 25 years.

He then leaves listeners with this to ponder:

What would our society be like with 25%, 30% or 35% unemployment? … I don’t know how you afford that, but even if you could afford it, there’s still the question of, what do people do with themselves? Having a purpose in life is, I think, an important piece of the stability of a society.

It doesn’t require a lot of imagination to think of the mischief young, idle hands can get into and the social unrest that could eventuate from a greater number of people feeling disconnected, and of no productive value.

This is an extract from The Gowdie Letter published yesterday:

The following headline is from an article published by the Illinois Policy think tank on 30 November 2016:


Source: Illinois Policy
[Click to enlarge]

As the Fight for $15 campaign, led by the Service Employees International Union, or SEIU, protested higher wages again Nov. 29, McDonald’s continued to unveil self-service kiosks throughout the country to counteract costly wage mandates.

McDonald’s announced Nov. 17 it was expanding its digital self-serve ordering stations to all of its 14,000 restaurants nationwide.

As the sub-headline says “Calls for a minimum wage hike are increasingly met with businesses using technology.”

The future that Art Bilger sees for US employment is already here…it’ll happen more quickly than we think.

This is not an issue isolated to the US. We live in a world of economic connectivity.

The growth in part-time employment, at the expense of full-time jobs, is happening.

At best, with the brightest rose-coloured glasses you can wear, we can look forward to very modest wage increases and unemployment levels (due to the statistical anomaly of a part-time job being counted as employed) remaining in the 5% to 7% range.

At worst, we have the bleak picture Art Bilger is painting of stagnating, or falling, wages, and rising unemployment.

And, don’t forget, government revenues are ultimately connected to household incomes. How can already heavily-indebted governments (with ballooning healthcare and welfare expenses) go further into debt without the revenues to support the servicing costs on that debt?

There are no good outcomes for the collision that’s taking place between the promises made in the final boom years of the Industrial Age and the reality of what the future holds.

Neither the best nor worst case scenarios I’ve outlined are going to deliver the debt-propelled growth policymakers so desperately seek…artificial growth that will absolve them from making tough choices.

Hard decisions are going to be made — either voluntarily or involuntarily.

This is the potential reality you are not being told. It is unpalatable. It is contrary to ‘we just need to spend more to resume growth’ story.

Is it doom and gloom to warn people of impending danger? Or is it a civic responsibility? Should the Bureau of Meteorology always forecast sunny skies because people want to enjoy outdoor activities, even when severe storm activity is brewing? Or, does it do the responsible thing and warn of impending danger?

Anyone who does not peddle the line of ‘we’ll have a soft landing and growth will return to normal soon’ is label pessimistic.

Well, sometimes, bad things happen. History is full of stories when things got out of balance and had to be corrected.

The global financial system is more unbalanced than at any other time in history. The extent of entitlement promises made is without precedent.

Population numbers have never been greater. The speed of disruption is much faster than during any other period of transformation and advancement.

The sheer scale of what confronts billions of people — their finances, livelihoods and lifestyles — is difficult to comprehend.

The past 30 years have been a dream run. We are conditioned — from decade after decade of debt accumulation — to believe ‘what has been will continue to be so’.

The dynamics have changed.

Prime Minister Turnbull was right; what we experienced in the September quarter was a bump in the road…but that road is headed for a cliff called ‘economic reality’.

Buckle up.


Vern Gowdie,
For Markets and Money

Editor’s Note: Australia’s economy is shrinking. Third quarter figures show the biggest GDP fall in eight years. The 0.5% fall in economic output was five times higher than analysts had predicted. Those same analysts are now predicting a rebound next quarter. But what if they’re wrong…again? What if this is only the beginning of a long and painful decline. Vern Gowdie has been preparing his readers for precisely this possibility. You can find out more here. Don’t put this off. The survival of your wealth may depend on it. Go here now.

Vern is a contributing editor to Money Morning — Australia’s biggest circulation daily financial email. (To have Money Morning delivered straight to your inbox you can subscribe for free here).

Vern has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia's Top 50 financial planners. His previous firm, Gowdie Financial Planning, was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top 5 financial planning firms in Australia.

Vern has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. In his leisure time Vern remains active with triathlons and pilates.

Money Morning Australia