The Recession Australia Needs?

It’s been over a week since the federal budget was announced. Have you had a chance to look over it?

Or had the desire?

If you have (and we wouldn’t blame you if you haven’t), you’ll notice that Treasure Scott Morrison and the Turnbull government seem quite confident that Australia will continue to grow. They see no threat to the economy or markets in the near future.

With the government so focused on tax cuts, it seems that they’ve completely forgotten that Australia hasn’t had a recession since the ‘90s. And that with the property market bubble, a crash doesn’t seem all that unlikely.

Almost all Western countries experienced a recession during or immediately after the GFC. Australia was a rare exception. And in the past decade most countries have seen their markets rise from their GFC lows. Meanwhile, Australia’s market hasn’t grown significantly.

Our housing market is in a bubble, as prices continue to grow. But Australians, especially first home owners, are struggling to buy as prices are too high relative to incomes.

With inflation and wages growing at nearly the same rate, and housing costs rising, living expenses are becoming harder to keep up with. Especially for low income earners.

And while the government believes an income tax cut will help, it’s only $10 extra per week for the lowest income tax bracket. Not an amount people can live off, unless it comes with wage growth.

With the RBA’s interest rates already at a record low 1.50%, there’s little wiggle room for them to react to an economic shock.

So it seems increasingly likely that Australia will not be equipped to handle a financial crisis, if one were to happen in the near future.

And with the market volatility we’ve seen this year, some experts are questioning Australia’s position. 

Elizabeth Proust, the chairman of the Australian Institute of Company Directors (AICD), stated on the ABC’s Q&A program:

We’ve had 26, 27 years of uninterrupted economic growth and some of the figures in the budget — 3 per cent growth each year, GDP growth, 2.5 per cent wage growth — are, shall we say, optimistic.’

She continued, ‘…some of us can remember but it is tough and we’re not necessarily well placed as a community and a society for that’, when challenged by the Minister for Cyber Security, Angus Taylor, who defended the budget. Taylor believes the types of investments the government is making as outlined in the budget, means a growing economy puts Australia in good stead for the future.

Shadow Treasurer Chris Bowen was inclined to agree with Proust, stating:

I actually think we are vulnerable and we need to do better on budget repair

We need strong sustainable budget surpluses going forward.’

With the Reserve Bank of Australia unable to flood the economy with cash, a recession may be the only way out Australia has. A lot more pain before any gain.

According to John Hewson’s (professor at the Crawford School of Public Policy, ANU, and a former Liberal opposition leader) recent article for the Sydney Morning Herald:

We in Australia are particularly exposed to another crisis with household debt (mostly mortgages) at historic levels, the cost of living blowing out, with household incomes constrained, and job insecurity mounting, our banks still importantly dependent on offshore funding, and having pursued risky lending practices. The Reserve Bank is powerless to do very much at all — probably just watch from the sidelines, and hope.’

While Australia was well placed in the last financial crisis, it doesn’t seem that will be the case the next time round. So will next time be the recession Australia needs to have?

To read more about Australia’s precarious economic position, and how to protect yourself and your family’s wealth from a housing or stock market crash, check out Vern Gowdie’s The Gowdie Letter.

And for another daily perspective on markets, their cycles and the dangers to Australia’s economy, sign up here for our free new daily e-letter from the man who predicted the 2008 GFC, Harry Dent’s Harry Dent Daily.

This week in Money Morning

In Monday’s Money Morning, Harje looks at the idea of placing many bets…or in this case, trades. Now, many people may believe that the more trades you place, the higher chance you have in receiving profitable returns. But according to Harje, the less trades you make, the less risk you have and you have the potential to make more returns. And there is one region where you could get unique opportunities full of potential. To find out more, go here.

In Tuesday’s Money Morning, Harje looked at the increasing worry the US has towards China’s tech boom. And after US President Donald Trump stopped China’s mobile company ZTE, they were forced to close, but he came back in and saved the day. And this could benefit Australia, Perth to be more exact. To find out how ZTE could help build something huge in Perth, go here.

On Wednesday, Harje looked at the benefits of habits. Now, as Harje explained, habits can be beneficial to those suffering viral encephalitis, a disease that eats at the memory of the sufferer. But it could also be converted to everyday practices. Those practices? Social media…Facebook to be exact. Now, Facebook has taught users to be creatures of habit, and log in everyday to receive a reward. And we do, that’s why it’s so popular. But online shopping in China has also boomed due to habit. To find out how you could potentially benefit from the habit of Chinese online shoppers, go here.

In Thursday’s Money Morning, Harje once again looks at what everyone is being told are the good companies to invest in. He also discusses why investing a huge amount of money isn’t always the way to go. Take small-cap stocks, for example. Harje explains why huge amounts of money can significantly over value a stock. Which, doesn’t favour the company or the investor. To find out about the stocks Harje believes have a lot of value, click here.

In Friday’s Money Morning, Harje looks to the world of retail. To be specific, ecommerce. Amazon came to Australia last year, opening up their first warehouse in Victoria. And while Amazon is very successful in the West, in the East it’s another story. As Harje explained, only 1% of China’s ecommerce market is made up by Amazon. In China, is their Amazon. There’s a huge ecommerce market in China, if you want to learn more about it, go here.

Kind regards,

Alana Sumic,
Editor, Money Weekend

Publisher’s Pick: ‘Three Ten-Baggers in 2018’ Last year a select few Aussies scored gains of 1,111%… 359%… Now it could be your turn. There’s a wealth of incredible, potential-packed stocks hidden in the ASX. Now we want to give you the chance to get in on the next round. The market is packed with massive possibilities in a bunch of sectors. But these three Aussie stocks could be your best bet at 10-bagger gains. If you wait too long, this crazy tech run could be over… [more]

Alana Sumic is part of the editorial team here at Money Morning. She contributes to bringing you Money Morning each day, along with all of Fat Tail Investment Research’s many other publications.

As the Editor of the weekend edition of Money Morning Alana brings you a summary of the news for the week, and her own take on the week’s most important story in markets. She is also a writer and editor for Fat Tail Investment Research’s political publication, The Australian Tribune.

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