Are we headed for recession?

What you need to know.

Recent growth numbers confirm the fragile state of our economy. With three quarters of very weak growth, record levels of household debt and volatile global markets its seems increasing likely that we are heading into the perfect storm.

To make things even more difficult to predict, we are seeing mixed messages from the markets. The bonds market in recent months has been pointing to a weakening global economy and further interest rate cuts – actually inverting yield curves and negative real official interest rates are foreshadowing a recession.

However, the stock market appears to have ignored these signs pushing to prices not experienced since pre-GFC levels. In such a low yield environment, it appears investors are ignoring fundamentals of value and risk.

The Prime Minister Scott Morrison is hopeful that the recent RBA interest rate cuts coupled with the tax cuts and increase to minimum wage will boost consumer and business confidence. Unfortunately our Central banks balance sheets have remained bloated with debt from previous quantitative easing during the GFC. In fact their balance sheets are more than three times their size pre the financial crisis and are seriously restricted in their ability to reduce debt or further stimulate a slowing economy.

Our banks balance sheets are also heavily exposed to the housing market, with some experts calling to question the quality of the loans. Of particular concern are highly geared interest only mortgages, borrowers now experiencing negative equity and increased mortgage stress (even with record low interest rates). Sub-prime debt crisis anyone?

Respected hedge fund founder Ray Dalio has joined the chorus of voices warning that the U.S. economy risks falling into a recession before the end of next year. 

“Recessions are always inevitable,” Dalio said in an interview with CNBC. “The only question is: ‘When?’ I think that in the next two years, let’s say prior to the next election (2020), there’s probably a 40% chance of a recession. I think you are seeing this around the world.”

With weak political leadership, Australiaʼs future has been jeopardised with short term thinking at the cost of the longer term. The RBA has embarked on a desperate attempt to try to sustain growth and employment that in the end will result in negative interest rates, printing of money and significant longer term consequences. 

Our political leaders are trying to not say the “R-word” and avoid it at all costs, but ultimately a short and managed recession may be the best way to reset the economy and prepare it for longer term viability and reform. 

The recession we had to have?

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