It’s been 29 years since anyone has uttered the word recession in Australia and meant it.
As trade tensions between the United States and China continue, deep uncertainty about the state of world markets has this week left blood on the walls. There are serious fears of a global recession.
More than $63 billion was wiped from the ASX in just minutes on Thursday as shares plunged almost 2 per cent after a horror session on Wall Street.
To put this in investment terms, the benchmark S&P/ASX200 index was down 136.8 points, or 2.07 per cent, to 6,459.1 points at 1200 AEST while the broader All Ordinaries was down 137.9 points, or 2.07 per cent, to 6,539.6 points.
The latest turmoil was set off by news yields on 10-year US Treasury notes fell below the two-year yield, intra-day, for the first time since 2007. For many investors, this is widely seen as a sign bad times are coming. This situation, otherwise known as an “inverted yield curve”, has preceded every recession in the United States since 1955.
The recession we had to have
The last time Australia’s economy was in a recession Home Alone had just topped the local box office and British-American rapper Young MC’s ‘Bust A Move’ beat Aussie rockers, Skyhooks’s ‘Jukebox In Siberia’, as single of the year.
It was November 29, 1990, when then Treasurer Paul Keating confirmed the nation’s economic status with the now infamous words “this is the recession Australia had to have”.
Cabinet papers for 1990 and 1991, released by the National Archives of Australia, reveal to depth of the troubles facing the economic reforming Labor team of Keating and Prime Minister Bob Hawke.
Economies across the globe fell into recession and the chaos barrelled toward Australia. The leftover largess from the age of corporate excess in the 1980s was catching up with many. Corporates, including the Pyramid Building Society in Victoria in 1990 and the State Bank of SA in 1991, crumbled under the weight of bad loans written chasing unrealistic growth.
When Keating called the recession, the average weekly wage was just under $460 and the country’s unemployment rate stood at 6.942 per cent. It would experience a further steep rise in the years that followed, peaking at 11 per cent in 1993. Today’s jobless rate is 5.2 per cent.
Interest rates were also at a staggeringly high 17.5 per cent in January 1990. This compares to today’s official cash rate of just 1 per cent. For home owners, that meant $17,500 in interest for every $100,000 they borrowed for their mortgage, in broad terms, compared to $1,000 today.
For almost three decades solid economic management has seen Australia dodge the recession tag. It is a feat only the Netherlands have matched.
As RBA deputy governor Ric Battellino noted in 2010 many developed economies have experienced two episodes of negative growth during the 2000s – one in 2001 following the collapse of the dot-com bubble and one in 2008 following the collapse of the US sub-prime housing bubble.
Tax cuts, record low interest rates and a pipeline of coal and iron ore exports to China are among the list of things the Australian economy has going for it.
Yet the RBA yesterday said Australia is not entirely safe from fall-out from the escalating US-China trade dispute. It could in fact suffer from a longer-term breakdown in rules-based systems.
Reserve Bank deputy governor Guy Debelle told an audience in Sydney – Australia’s status as an exporter of resources rather than components meant it was more exposed to China’s domestic economy than its exports.
US President Donald Trump hinted this week that he understands his big gamble on China may be hurting Americans as well as weakening Beijing’s economy, when he delayed a planned new US$150 billion tariff hike.
Dire economic data from China and Germany suggested a faltering global economy, stricken by the increasingly belligerent US-China trade war, Brexit woes and geopolitical tensions.
Germany reported a contraction in second-quarter gross domestic product, and China’s industrial growth in July hit a 17-year low.
AMP Capital chief economist Shane Oliver said the US/China trade war has added “significant uncertainty globally” with businesses losing confidence to invest as their decision could be rendered “uneconomic” by a tweet from Trump.
“This is dangerous and hopefully a solution is reached soon,” Mr Oliver told nine.com.au.
“Trump is under some pressure to do so because if he lets the US economy slide into recession soon then history tells us he won’t be re-elected next year.”
Mr Oliver said while the situation had heightened recession risks for Australia, in his view, there was no cause for immediate alarm.
“While the risk of recession globally and in Australia has gone up â largely due to the disruption being caused by President Trump’s trade wars â I think it will be avoided,” Mr Oliver told nine.com.au.
“Australia is at risk because slower global growth will lead to less demand for our exports and hit confidence. But the combination of further rate cuts, tax cuts and infrastructure spending should be enough to keep our economy growing â even if only slowly.
“Yes, there is a danger that all the talk of recession creates fear and becomes self-fulfilling. In particularly all the talk about inverted yield curves signalling recession is over the top â as they are not completely reliable and other indicators are not consistent with imminent recession.
UNSW Business School associate professor Elvira Sojli echoed Mr Oliver’s view point.
Ms Sojli said it was important for Australians to remember the country is not a target in the trade-war but could feel the impact by association.
“Yes, there is uncertainty from financial markets coming from several different sources, a lot not related to Australia â¦ but we do have the RBA and government who are aware,” she told nine.com.au.Â
“The risks right now are relatively small. Should the average Australian be worried about this? I say no. I think this is going to be a slow process and there will be some adjustment.”
Nine finance editor Ross Greenwood also said a local recession was unlikely.
“I’m not suggesting Australia is heading for a recession anytime soon. Iron ore prices having been so strong over the past six months means it is highly unlikely we will go there.”
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