Australian Recession in the Works? Ask the Sharemarket

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All along it’s been assumed the fall in Australian shares is related to the credit crisis. But what if the stock market is actually forecasting an Australian recession?

The stock market is a leading indicator. Shares lead the economy. So if shares are heading down, is the market telling us the Australian economy will soon follow into recession?

It might seem counter-intuitive. After all, the country just racked up its highest trade surplus in 11 years last month. The Australian Bureau of Statistics reported a $1.36 billion surplus, mainly on the back of higher coal and iron ore prices.

The weaker Aussie dollar will certainly be welcome to exporters. That lowers the price of Aussie goods overseas. However it also comes with lower prices for base and precious metals (copper and gold). That’s not as good for diversified miners.

We’re quickly reaching the point-for financial AND resource stocks- where cashed up firms are going to be holding the whip hand (not the whip of calamity!). That is, if you have lots of cash and relatively little debt, you’re going to be in the position of buying a larger share of projects you like. Or perhaps taking them out altogether.

A recession in Australia would make for an excellent time to buy stocks. The trouble is a lot of Aussies may not have the cash to do so, judging by the household debt levels (see chart below). Household debt as a percentage of disposable income has gone up American-style over the last twenty years in Australia.

Household debt and interest
Source: Reserve Bank of Australia

Dan Denning
The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Comments

  1. Dan – interesting graphic re: debt. I’m guessing that the Aust govt debt is heading the other way? Two questions: (i) We are talking in Australia about the link to China and the benefits that this will provide – but little is written of the Chinese position/impact from this debacle in the US – what are the Chinese doing? (ii) What critical appraisal is going on in relation to the agencies that rate all this debt? I wonder why the NSW Govt would be too worried about getting an AAA rating from these jokers when they have stuffed up the rest of the market.

    barry dingle
    October 4, 2008
    Reply
  2. I’m looking to buy bucketloads of Mt Gibson at $1, just give me a call ahead of your hot money AUD sinking to 50 yen!

    Reply
  3. I guessed a year after the US. But I thought the US would get there quicker than it has …

    Reply

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