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Technically it’s not a recession – but it is starting to feel like it

WHEN the whole of the investment world starts to talk about the more daunting and likely prospect of a recession here in Australia, it causes everyone to acknowledge the possibility of that occurring. So in times of this uncertainty we turn to our esteemed fund managers to give us some direction. Shane Oliver is the chief economist and director of investment strategy for AMP Henderson Global Investors. AMP manages in excess of $700 billion on behalf of investors. There is, therefore, no question that his view of the market has considerable bearing on the investment strategies that will be applied by the AMP. We sought his views on the state of the current economy.

BN. Are we in a recession today?

The 0.6 per cent decline in GDP in the December quarter has justifiably sparked fears of a recession. The last time the economy went backwards was in 1991 – at the height of the last recession. Adding to concern was the downward revision to September quarter growth, which meant that the Australian economy shrank in the second half of the year.

While Australia had been widely tipped to outperform the US, recent data calls this into question. If Australian growth is reported on the same basis as the US, then we saw a decline of 2.4 per cent annualised in the December quarter compared to growth of 1.1 per cent in the US. In short, they grew while we contracted.

BN. What factors can you point to for the slowdown in the economy?

It is difficult to single out any one factor as each one has undoubtedly played a role. Some of the weakness can be explained by the transitional effects of the GST on spending patterns and anecdotal evidence suggests that confusion surrounding the Business Activity Statement (BAS) and the fact that the cash economy is starting to be caught in the tax net is also having an impact.

Additionally, last year’s rise in interest rates has been a key contributor as rising household debt levels have heightened household sensitivity to interest rate changes.

BN. So are we in, or are we headed for, recession?

The standard definition of a recession would require two consecutive quarters of negative growth and the unemployment rate to rise. While the unemployment rate should move higher (probably to about 7.5 per cent), a negative March quarter GDP outcome should hopefully be avoided. This is because housing should cease detracting from growth and business investment plans suggest business investment could bounce back. The weak $A should also help net exports. So, while there is a good chance we may “technically” avoid a recession we are seeing a slowdown that will hurt.

The National Bureau of Economic Research, which specialises in dating recessions, defines a recession as a “recurring period of decline in total output, income, unemployment and trade, usually lasting from six months to a year, and marked by widespread contractions in many sectors of the economy”. This is probably more likely. As discussed above the economy went nowhere in the second half of last year and will struggle for a little while yet. The unemployment rate is rising and the man-ufacturing and cons-truction sectors are having a particularly tough time. The current slowdown certainly has some of the important characteristics of a recession.

BN. So when will the present pall of gloom that has suddenly fallen on the economy lift?

We expect the economy to record growth of about 2 per cent this year, which would probably mean we would narrowly avoid falling into recession. The room for error though is slight.

We do expect the economy to start picking up through the second half of the year. Interest rates are falling and will be cut aggressively both here and in the US. Low inflation allows significant easing. Despite the headlines about fiscal policy, it is precisely for times like we currently face that fiscal policy needs to be eased.

We shouldn’t be too harsh on those proposing to ease fiscal policy at this time. Thirdly, much has been said about the weak $A but it should help exports considerably. It is also worth remembering that commodity prices have held up and Australian producers are securing good price rises in current coal and iron ore negotiations in Japan. Finally, Australian balance sheets are in good shape.

So, clearly we face a difficult year. The economy will flirt with recession in a technical sense regardless, and for many in the community it will be a tough year.

However, we do not expect the weakness to last and we expect to see better times emerging through the second half of the year

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