Proof that Australia May Not Be Headed for Recession

I sometimes feel a bit like the ancient Greek philosopher Zeno.

Born in 490 BC, he invented the concept of the paradox.

He was so skilled at arguing both sides of the fence, the confused Romans once threw him out of their country in apparent frustration.

Which takes me to the state of the economy…

There’s many calling an imminent recession as a forgone conclusion. They’ve reams of data to support them too.

The kind of stuff we talk about each and every week — debt, trade wars, negative interest rates, and all the other weird economic stories that seem to be the ‘new’ normal.

Some big name investors are worried too.

Billionaire hedge fund superstar Ray Dalio reportedly told a gathering of finance chiefs in Saudi Arabia this week that we’re approaching a ‘scary situation’ in the global economy.

But here’s the thing…

One statistic — a data point that’s preceded every major US recession in the last 50 years — says Dalio and the rest of them are all wrong.

And if it keeps up its 100% record then it’s likely both the world and Australia will weather the current headwinds.

Let me explain…

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The frenzy precedes the fall

The statistic in question is US housing starts. This measures the pace at which new homes are built.

Here’s the data plotted with recessions in grey:


Money Morning

Source: Bespoke Investment Group

[Click to open in a new window]

As you can see housing starts ramp up to a peak before every major recession.

It’s the boom before the bust that typically results in a property frenzy.

Today you can see that although housing starts are rising, they’re still far from the peak levels of growth as seen before other major recessions.

As the Bespoke Investment Group note explains:

Residential construction is a big part of the US economy, so naturally, an uptick or slowdown in activity is going to have an impact on the business cycle.

The chart below compares historical levels of Housing Starts on a 12-month average basis to expansions and recessions since 1967.

It’s pretty easy to see in the chart that peaks in Housing Starts tend to occur late in the cycle, while troughs are formed right after the recession ends.

What’s important to note, however, is that even after the peak level of Housing Starts for a given cycle, a recession doesn’t usually begin for at least another year.

So while we might see a slowdown in this figure over the next few months, it’s unlikely to lead to a full-on recession.

In fact, if this statistic holds true, then we can expect to see a huge rally at some point in the next few years before the next bust.

Anyway it’s an interesting viewpoint, given all the negativity out there.

What does it mean for Australia though?

The correction could be over

The US consumer drives global growth.

As the old saying goes, if the US sneezes, the world catches a cold.

And the reverse is also true.

So if the US economy keeps going up — and it’s hard to think of a situation where the Trump administration won’t do everything in their power to make it so in a 2020 election year – then Australia should trundle along quite nicely too.

And property wise, some Aussie economists are already pointing to price growth ahead. At least in the short term.

Moody’s economist Katrina Ell is confident that the housing correction has largely passed along the east coast. As reported by the Urban Developer:

“The national index for home values has fallen for almost two years, before house values began to rise in [Sydney and Melbourne] in the September quarter.” Ell said.

The RBA has reduced the cash rate by 75 basis points so far this year [with] a further 25-basis point reduction expected for early 2020.

This could trigger a pickup in the Sydney and Melbourne housing markets that is more aggressive than forecast [and] would likely lead to further household leveraging.

She estimates Sydney home prices could rise 8% in 2020 and Melbourne 7%. This will lead to a pick-up in house construction as developers and bankers get more confident.

Will it play out like this?

Who can say?

All I can tell you is to stay nimble in your thinking. Be like Zeno and examine the situation from all angles.

But unfortunately, unlike Zeno, you’ll have to make some firm decisions one way or the other.

After all we’re investors, not philosophers…

Good investing,

Ryan Dinse,
Editor, Money Morning

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Ryan Dinse is an Editor at Money Morning. He has worked in finance and investing for the past two decades as a financial planner, senior credit analyst, equity trader and fintech entrepreneur. With an academic background in economics, he believes that the key to making good investments is investing appropriately at each stage of the economic cycle. Different market conditions provide different opportunities. Ryan combines fundamental, technical and economic analysis with the goal of making sure you are in the right investments at the right time.  


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