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Has Australia fallen into recession?

April 4, 2019

All eyes on the GDP

Economists are poring over what monthly figures are available for December. The early numbers show weakness in retail and new car registrations, residential construction approvals and international trade. Not all the data is available yet but if the numbers continue to disappoint, we could see two quarters of negative growth – the technical definition of a recession. Economists will be watching the remaining numbers with huge interest while the market is already anticipating interest rate cuts.

Further, cooling house prices (especially in Sydney and Melbourne) mean that upping the cash rate could put more pressure on the housing market.

Australian dollar hits a 10-year low

The Australian dollar hit a 10-year low against the greenback (US dollar) in early January, dipping to 67.49US cents on the back of weak manufacturing data from China and the European Union. The global slowdown in demand flowed into production numbers, spooking investors who briefly sent the Aussie dollar down 3% before a recovery. The figures were just more bad news for international investors, who have little cause for optimism with slowing global growth, volatile equity markets and a US–China trade war. Treasurer Josh Frydenburg dismissed concerns about the Australian dollar as a response to weak trading volumes over the holiday period and US interest rate rises. But some investors worry about the Australian dollar’s exposure to the Chinese economy.

Consumer sentiment holds steady

Despite a slew of bad news around falling housing and share markets, concerns around global trade wars and political uncertainty in Australia, shoppers were surprisingly optimistic in the latest Westpac Melbourne Institute Index, with consumer sentiment holding steady at a “cautiously optimistic” 104.04 for the second week of January. Consumers looked to sharp falls in petrol prices, continued low interest rates and firm labour markets to give them reason to get out spending in the January sales.

Housing finance and construction

The housing market continues to dominate headlines and, unsurprisingly, housing finance trended lower on the back of softer demand and tighter lending conditions imposed in response to criticisms from the Royal Commission. Although October bucked the trend, the heightened scrutiny of conduct by regulators from the banking Royal Commission is certain to continue the pressure on housing finance approvals. More worryingly, construction activity slumped across different sectors on the Australian Industry Group’s (Ai Group) Performance of Construction Index (PCI). The index fell to 42.6 points – the fastest rate of decline in five years. Construction of new apartments was especially weak.

It’s not all bad news

AMP’s Chief Economist Shane Oliver is more upbeat about the prospects for the economy, pointing to the boom in infrastructure, the growth drag from the mining construction fading, and wriggle room for the RBA to cut further if needed.

Impact on you and your business

There is little doubt that there is a heightened anxiety around the economy in Australia as we enter 2019. The RBA did not meet this month and rates remained steady a 1.5% and there is little chance that we will see rate rises in 2019. How the softer numbers in retail and construction will play out in unemployment is the big question. But for now, the labour market is looking strong.
Despite the headwinds, it is a great time to be in business.