Australia may have found it hard to win at the FIFA World Cup, but the nation is outscoring most of the competition economically. Can the "lucky country" extend its record-beating 27-year economic winning streak or is it about to get much harder?

The latest gross domestic product data released on 6 June showed an economy powering along faster than the average of the OECD or G7 nations. The March quarter recorded a 1 per cent quarterly rise and an annual gain of 3.1 per cent, beating market expectations for gains of 0.9 per cent and 2.9 per cent, respectively, and setting the fastest rate of increase in nearly two years.

The GDP gain was helped by higher exports, government spending and non-mining investment. However, household consumption, which accounts for 57 per cent of GDP, contributed only 0.2 percentage point to the rise, with the household savings rate at its lowest level since 2007.

"With house prices falling and disposable income growth below trend, a change in consumer behaviour could result in a meaningful slowing in consumption growth, which would more than offset the positives from net exports and investment," said Morningstar's head of equities research, Peter Warnes.

Recession risk

Capital Economics argues that while Australia survived the 2008 global financial crisis relatively unscathed, the risk of a recession has risen, amid record high household debt following a housing boom in Sydney and Melbourne.

Paul Dales, chief Australia and New Zealand economist, points to three plausible triggers of a downturn, comprising a large fall in house prices, a credit crunch induced by the recent royal commission into the banking system and higher mortgage rates due to domestic or overseas developments.

"The tighter lending rules implemented by policymakers in early 2017 has successfully taken some heat out of the housing market … but with house prices now falling outright, there is a danger that the housing market could trigger a recession or a financial crisis," he said.

housing downturn risk economy article

A 15 per cent fall in house prices could prompt a downturn

While house prices have recently cooled, Dales sees a 15 per cent fall in prices as a trigger for a downturn.

"In the wrong set of circumstances, house prices in the eight capital cities could fall by 20 per cent, and in Sydney and Melbourne could drop by up to 30 per cent. Such falls would surely weaken the economy and raise mortgage default rates enough to call into question the quality of banks' assets," he said.

A 40 per cent drop in housing finance commitments caused by a credit tightening could also ring alarm bells, as could a mere one percentage point increase in official interest rates.

However, Dales rates the chance of a recession – technically two consecutive quarters of negative GDP growth – at only 20 per cent, with about a 10 per cent chance of a financial crisis.

This is due to the ability of the Reserve Bank of Australia to cut interest rates or embark on quantitative easing, or for public funds to support banks and households.

The RBA's May 2018 Statement on Monetary Policy projects stronger economic growth ahead on the back of increased household consumption and greater non-mining business investment. It projects GDP growth to average 3 per cent in 2018, rising to 3.25 per cent in 2019 and 2020.

However, economist Gene Tunny warns that Australia’s economic sunshine will not last forever.

"Eventually there will be a downturn; it's just the nature of the business cycle. We've learned that you can’t fine tune your economy to never have a downturn – that's impossible," he says.

Tunny, principal of Adept Economics, notes the impact of population growth on supporting Australia's economy, unlike other advanced economies. He also notes the nation suffered an "income recession" during the GFC.

"Based on the data, we've grown every year, but it's not as if we haven't had any downturns – we haven't completely eliminated the business cycle," he says.

While Tunny notes the concerns around Australia's high level of household debt and the risk of a global trade war or other geopolitical shock, he says conditions remain generally positive amid synchronised global growth.

"We should expect at least another year or two of growth in the Australian economy. Beyond that who knows – but in any case, expansions often die of old age. Eventually we'll have a downturn, but you can't really forecast when though."

Morningstar's Warnes says Australia's geographic location near fast-growing Asian markets has placed the nation in a good position economically, "but we've got to start thinking much smarter than we have".

"We can't continue to rely on China thinking that the quarry is going to be open and they will continue to buy," Warnes says. "They will continue to be a very strong trading partner, but I think resources won’t be our No 1 export in the next 10 years or so."

"We have to get out of the mentality of dig and ship to work on exports that are not resource-related, such as education, tourism, healthcare, technology and other services. That's if we want to stay in a relatively strong position within the Asian basin – it's not the sheep's back or a hole in the ground anymore, it's more cerebral."

 

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Anthony Fensom is a contributor to Morningstar Australia

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