Recession unlikely but vulnerabilities exist

Oversupply in the housing market and dependence on growth in China have been flagged as key areas of vulnerability in the Australian economy, according to the latest Econosights report by AMP Capital senior economist Diana Mousina.

While the chance of a recession in the near term was described as “low”, the report pointed to vulnerabilities that could “leave an economy exposed to downside shocks” and then to a recession.

“Most recessions have been preceded by a build-up of excesses,” the report said.

“The outlook for the Australian economy remains good, but not spectacular.

“These vulnerabilities may present more of an issue around 2019 when infrastructure spending tops out (as federal government grants to the states start declining), housing construction is in a down cycle and interest rates start increasing again.”

The rise in house prices has had the effect of raising consumer confidence in spending, making “household consumption (at nearly 60 per cent of GDP)… more reliant on the performance of housing”.

“We see interest rate hikes and a boom in the new supply of dwellings (particularly for apartments) as being the two key near-term headwinds for dwelling price growth and household wealth,” the report said.

Though the RBA might be “slow” to hike interest rates, debt servicing costs would increase, which would impact disposable income; additionally, housing completions were surpassing demand for new housing.

Potentially pushing down price falls further were investors, due to the “high skew of investor loan growth in this housing upswing” that also “increases the risk that they may exit the market if returns deteriorated”.

The deceleration of China’s growth would also impact Australia, the report said.

“This concentrated trade relationship was very helpful during the global financial crisis, when China’s economy held up well, but is now a risk,” the report said.

The three areas of concern outlined by the report regarding the Chinese economy were the management of lowered levels of growth at a “sustainable level over time, without crashlanding the economy”; the growth of the economy with lower levels of debt “after such a large build-up in debt balances”; and the overcapacity of particular industries such as steel.

Other opportunities with China lay in the “boom in the middle-income Chinese consumer”, which opened up prospects “for Australian exports in agriculture, healthcare, education and tourism”.

GDP growth was forecasted to rise to 3 per cent next year, but Australian shares would still underperform compared to other countries in the short term.