Australia’s Secret to Dodging Recession

Australia’s Secret to Dodging Recession

When it comes to attacking government policy, immigration is an easy target.

The explosive population growth, particularly if you live in Melbourne or Sydney, is something you can see all around you.

The trains are full.

The trams and buses are crowded.

Public schools are bursting and underfunded.

There’s a long wait at bulk-billing medical facilities.

And traffic is so bad we have convinced ourselves it’s taking twice as long as it ‘used’ to get anywhere.

Right-leaning politicians are quick to jump on these perceptions.

Former Prime Minister Tony Abbott is crying out for annual immigration to be cut to 110,000 from 190,000. Minister for Home Affairs Peter Dutton is another calling to drastically reduce the intake of migrants.

In my view, they both miss the point.

Australia is a country founded on migrants.

It began with the exile of convicts.

Then a flood of mostly Welsh and Cornish settlers looking to strike it rich in the gold rush.

Not long after, this was followed by the abhorrent White Australia policy of the early 20th century and the influx of refugees in the aftermath of the Vietnamese War.

Ultimately, migrants that settled here and made Australia their home are a fabric of our cities and towns.

Yet what anti-immigration proponents ignore is the fact that our immigration policy is a key factor keeping Australia out of recession today.

Blind luck and government intervention

Australia is in its 27th recession-free year.

This record-breaking period of economic growth comes down to blind luck and occasional intervention.

The relaxation of bank lending in the mid-1990s allowed Australians to take advantage of the reinstatement of negative gearing in the final years of the Hawke government.

Meanwhile, Australia’s tiny tech sector was the only real casualty of the dotcom bust, leaving the stock market and economy untroubled.

Following that, the Aussie construction boom that began in 2001 coincided with China’s rise as an economic powerhouse, putting a rocket under Australia’s iron ore export sector.

Similarly in 2008, we avoided the financial crisis when China unleashed a credit-fuelled construction boom, once again boosting Aussie iron ore exports.

Truck drivers and diamond drillers were making as much as doctors and lawyers. No price for a house was too great, banks lent because everyone knew that housing ‘always’ goes up.

Don’t get me wrong, the Aussie stock market barely went anywhere during this time.

Yet in a period that crippled international markets, Australia sailed through relatively unscathed.

The digging and lending cycle that defined the start of this current decade led to Aussie banks becoming the most profitable in the world. At one point, Aussie bank profits alone made up 2.9% of national GDP.

Just three years ago, Australia defied recession once again after China’s yuan devaluation in August 2015.

Not long after, though, the situation required intervention.

Prices for commodities dropped. People reduced spending. Wage growth officially became stuck. Construction — a sector that employs 11% of the Australian economy — began to disappear.

In light of this, the federal government stepped up in late 2016 and began announcing massive nationwide infrastructure projects.

Anything to keep our enviable recession-free run going.

But the only reason this blind luck and economic intervention worked was because of high migration numbers.

Broke four times in 15 years

Australia’s population has grown 50% in the past three decades. And if it weren’t for the constant flow of migrants to our shores, Australia would’ve been broke four times over.

The definition of a technical recession is two consecutive quarters of declining GDP growth.

As you can see in the chart below, when you strip down the numbers to show economic growth per person (blue line), there are four periods in the past 15 years in which Australia faced the real prospect of recession.

Take a look:

Economic growth per person

Source: Bloomberg

The graph would’ve looked much worse if we didn’t have the influx of new migrants coming to settle in Australia permanently.

The point is, Australia’s booming population, at 25 million, is one of the few things keeping us out of recession.

The simple reason for this is that the more people there are, the more spending there is in the economy. That applies to both the public and private sector.

In addition, the waves of new workers settling in Australia should help balance out the 25% of the population retiring over the next decade. We simply don’t have enough young people to fill this gap.

Whether some people care to admit, the ongoing prosperity Aussies enjoy now heavily relies on new migrants.

If policymakers put an end to that, the rug will be ripped out from under the Australian economy in time.

And it would almost surely take our record-breaking recession-free run with it.

Kind regards,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia