Varoufakis Warns of Australian Recession

Australia Economy
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Former Greek finance minister Yanis Varoufakis has added to calls warning of an Australian recession.

If you’re anything like me, it’s enough to make you sit up and take notice. You know things are bad when a Greek economist starts lecturing Aussies on recessions.

Of course, Varoufakis isn’t your typical outsider. One thing you may not know about him is that he once taught economics at Sydney University. He’s not merely parroting what others have already said. He has intimate knowledge of Australia. He talks about the country as a second home because it is. Varoufakis worries about, and cares for, the future of the Aussie economy. And we’d be wise to heed his warning.

Regular readers at The Daily Reckoning will know where we stand on this. A recession is something we’ve been warning of all year. We did so even when few economists dared mention it. Our investment analyst, Greg Canavan, wrote a report about the coming recession, which you can read here.

It’s taken time, but people are finally getting the message. Over the past few months, there’s been a considerable shift in market sentiment. The mainstream’s hope for avoiding recession has turned to resignation. What once seemed a distant possibility has become a likelihood, if not outright certainty.

People now understand the once in a lifetime mining boom is over. Our government didn’t prepare adequately for its eventual end. And it may be a long while before the next cycle begins.

Varoufakis knows all this. And he knows that, like Canada, or Brazil, commodity exporters all meet the same fate. And who better to ask? Here’s a man with intimate knowledge of economic slumps. He served in a government that had firsthand experience of recessions. He presided over an economy that’s seen GDP decline by 25% since 2008.

Not many Aussies have that kind of experience. It’s been 23 years since our last recession. There’s a whole generation that’s grown up without ever knowing what life is like in a slump.

Perhaps that’s why people remain sceptical when you warn them of it. They’ve come to regard Australia as bulletproof. A quarter of a century without recession will do that…It’s a great track record, the kind that makes you think it can last forever. But history doesn’t stand still. And the good times never last.

We can keep banging the pot forever. We can warn people that a recession is not only likely, but probable. But even we start feeling like broken records. Eventually, people stop listening. And who can blame them? If someone keeps telling you the world will end, and it doesn’t, what would you do? You’d stop caring. You’d start thinking of them as charlatans and doomsayers.

Instead, you’d listen to policymakers. The Reserve Bank will talk of ‘improving economic conditions’, and you’ll believe them. Why? Because, until we’re in recession, they’re right. It’s easy being a contrarian when it comes to recessions. But policymakers are just as rudderless as the economy they’re steering.

 

Why the coming recession is set in stone

Either way, it’s not hard to make a case for a recession. The only difficulty is predicting its severity and length.

Varoufakis points to the same handful of economic factors we’re all familiar with. You’ve heard the same story a million times. But it never grows old because it’s rooted in fact.

On the one hand, China’s slowdown is hurting our economic prospects. You know it. I know it. And policymakers know it. We simply don’t receive revenues we saw at the height of China’s pomp anymore. The effects of this cascade right throughout the economy.

At the same time, weak business investment isn’t helping offset China’s downturn. A lot of that falls on the mining sector. But non-mining investment just isn’t big enough to replace it.

We’ve seen evidence of this over the past few weeks. ABS figures for the September quarter showed business investment falling 9.2%. Even worse, that was down 20% from September 2014.

Businesses are simply too preoccupied with rewarding investors through buybacks and dividends. Spending just isn’t a priority. And while shareholders feel better about themselves, this small mindedness is harming our economic prospects. Without investment, growth is impossible. We need businesses to invest in both projects and people. Yet their insistence on ‘investing’ in shareholders is holding the economy to ransom.

Between these two factors, you have all the ingredients for a recession. Sometimes it’s really as simple as that. Here’s what Varoufakis had to say (emphasis mine):

‘[China isn’t] at the stage of development where it can continue to defy the global deflationary atmosphere.

There will be a recession in Australia, because of the collapse of investment and because of the collapse of animal spirits — and this is because of what’s happening in China.

The recession itself would not be the problem, because some recessions are necessary. Some recessions are a bit like bush fires that clear out the forest, and help with the regeneration.

The fear would be that this is something more secular, something more like stagnation, and a systemic crisis. I’m not saying that is going to happen, but if I were a politician here, this is what I would be worried about.’

Varoufakis makes a strong point about recessions that’s often overlooked. A recession on its own doesn’t mean much. It could be mild, temporary, or both.

The bigger threat instead is that it morphs into a prolonged period of sluggishness. Like, say, zero growth stagnation or, god forbid, deflation.

Policymakers are trying to rebalance economic growth away from mining. But they’re having limited success. Varoufakis understands that this transition away from resource investment is taking longer than expected. He notes:

There has been a significant reduction in investment in things that maybe were over-invested anyway, like mining, but there hasn’t been a transfer of that investment into other sectors, especially that of the innovation that Malcolm Turnbull is so keen on.’

GDP figures this week could tip economy into recession

This week, GDP figures for the quarter to September are due. Depending on how things pan out, we could be in recession by Wednesday.

In saying that, economists expect Q3 growth to come in at 0.7%. Anything at, or above, 0.3% would stave off a technical recession. So it leaves plenty of leeway considering economists are forecasting more than double that amount. Then again, economists badly misjudged business investment figures recently, by some 7% if you can believe it. Which makes their recent track record less than stellar. There’s no telling then what surprises the GDP figures might throw up.

But the timing of a recession isn’t altogether important. Sooner or later, the recession will hit. The only thing we won’t know is whether or not it overstays its welcome. We can only hope that we’re not entering a sustained period of stagnation.

Nonetheless, those preparing for the worst can protect themselves from the fallout. Greg Canavan’s free report, ‘Australian Recession 2015: Unavoidable’, will show you how to do just that. Download your free copy today to learn how to protect your wealth from the coming crash. To find out how to download the report, click here.

Mat Spasic,

Junior Analyst, The Daily Reckoning

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