RECESSION UNLIKELY, BUT IT MAY YET FEEL LIKE IT

Written on the 1 March 2016 by Nick Nichols

RECESSION UNLIKELY, BUT IT MAY YET FEEL LIKE IT

AUSTRALIA'S 25-year run without a recession is expected to continue, although it might not feel like it, according to BIS Shrapnel.

The collapse of global mining boom has claimed the economies of Canada, Brazil and Russia in the past year. But while Australia has been spared the same fate, BIS Shrapnel researcher Dr Frank Gelber warns that the shock from the collapse is yet to hit.

"Now comes the correction," he says.

Gelber remains confident that a recession is not on the horizon for the Australian economy, and this is largely due to its status as a low-cost producer of resources.

The surge in the domestic tourism market and a spike in the education sector is also contributing to economic growth," he says.

"There is little risk of recession, but we're stalled, waiting for the non-mining economy to pick up."

While Canada has returned to economic growth, both Brazil and Russia remain in recession, a situation that has been exacerbated by a sharp drop in global oil prices.

Meanwhile, Australia is living up to its 'lucky' mantle as export volumes have continued to grow by 8 per cent a year over the past three years, despite falling commodity prices keeping a lid on the value of those exports.

"Without this export volume growth, Australia would have gone into recession," says Gelber.

"We are only at the beginning of the decline in mining investment, but we are still looking at strong growth in production and exports.

"The net effect is that the negative impact from falling investment is being offset by continued growth in production.

"Having been a strong driver of growth during the boom, mining is now not contributing at all. That is why growth is, and will remain, weak."

Gelber remains 'pretty optimistic' about the economy's near-term prospects although he says the transition is 'agonisingly slow'.

"Business isn't ready to invest yet. Demand is weak, profits are weak and there is still excess capacity. It will take years for business investment to build momentum."

Gelber says the key rests with the lower Australian dollar and its boost to export competitiveness.

BIS Shrapnel is forecasting GDP growth of 2.5 per cent in FY16, rising to 3.1 per cent in FY17, aided by LNG projects coming online.

It warns that the construction boom currently driving economic activity domestically will run out of steam in FY18 and FY19, which could impact on economic growth.

"We believe a recession in Australia is highly unlikely," says Gelber.

"That said, growth will be soft for another three to four years as non-mining business investment remains weak, weighed down by a pervasive cost-cutting mentality, plenty of spare capacity and weak demand and profits.

"There's no magic wand for the economy, and the shift to non-mining investment will be agonisingly slow. But it's not all doom and gloom.

"Yes, growth will be soft, but it's still growth."


Author: Nick Nichols

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