Goldman Sachs is bearish on Australia at the best of times. Whether it’s iron prices or the Aussie dollar, the investment bank rarely has anything positive to say.
It’s no different this time around, with the bank forecasting a typically downbeat assessment for the Australian economy.
Goldman’s double dose of bad news starts with a 0.25% revision for GDP growth in 2016. The bank forecasts the economy growing at just 2% next year. That’s scraping the bottom of the Reserve Bank’s growth target of between 2–3%.
Worse still is what Goldman says about a potential recession. The bank predicts Australia faces a one in three chance of recession by mid-2016. It’s reasons?
Ongoing slumps in both business and housing investment were the driving factors. The bank believes there’s a strong chance both will remain weak over the next year. Such an outcome would raise the likelihood of a recession by the mid-2016.
Of course, you could add a whole host of problems to that list too. Declining profits and wages, government spending cuts, and weak commodity prices are just a few that come to mind. However you cut it, it all adds weight to a looming recession.
Here at the The Daily Reckoning, we share Goldman Sachs’ bearish outlook on the economy.
Our editor, Greg Canavan, has maintained all year that a recession was unavoidable. Unlike Goldman however, Greg says a recession will take place in 2015. You can read Greg’s study into the coming recession by clicking here.
But the timing of Goldman’s forecast is curious for another reason altogether. Its estimate falls directly in line with the federal election. Voters are heading back to the polls prior to June 2016.
Why does that matter?
It’s because the Coalition government doesn’t want the stain of a recession on its record. That was one of the election promises that swept them into office in the first place. A failure on this front will weaken its prospects going into the 2016 election.
Because of this, the Coalition government might put its deficit busting on hold for the time being.
By putting the ‘budget fix’ on hold, the government can spend its way to growth. That could be one solution in avoiding negative GDP growth. And it would do its chances of re-election no harm.
Will the government spend more? There’s good reason to believe it will. There were signs in the June quarter that government spending was already on the rise.
Government outlays accounted for most of the 0.2% growth in Q2. Without that the economy would’ve barely grown at all. Despite this growth still came in well below expectations of 0.4%. So it may resort to further stimulus in a bid to raise growth.
The government now knows that avoiding recession won’t be easy. Achieving growth through exports or business investment is beyond the economy at this point. Neither will recover fast enough to make a major contribution to growth over the next several quarters.
That leaves it with the obvious option: spend, spend, spend.
Doing this would come with its own costs though.
For one it would be a setback to government plans to reduce the budget deficit. At $35 billion, tackling the deficit was a big focus for the government in the 2015–16 fiscal year. That in turn would delay targets of reaching a budget surplus by next decade.
And this spending wouldn’t come cheap either.
The government would finance new spending projects by taking on more debt. That would only add to the nation’s growing debt pile.
Not doing anything may not be an option. Otherwise voters may vent their anger by kicking the Coalition out of government.
Yet Goldman does think the government will get some help. It forecasts the RBA cutting rates to 1.75% in response to weak growth. Further, it says the RBA may go even lower if banks refuse to pass cuts onto borrowers.
Goldman says the recession will be temporary
Despite its bleak outlook for the economy, Goldman expects a temporary, not lasting, recession. The bank says a potential recession would be a ‘shallow and near-term event’. In other words, we’d be out of it as quickly as we got in. That could result in a recession that lasts, at worst, one quarter.
Why does it think this?
Goldman expects the economy will turn around by mid-2016. The bank forecasts a rebound in exports volumes and revenues. It puts rising LNG exports at the forefront of this recovery.
Here’s what it had to say:
‘It’s likely that, should a recession occur, it would be squeezed into the period prior to the ramp-up phase for LNG production from the second half of 2016’.
We may not be in recession anymore once the effects of this picks up. Goldman’s outlook on LNG suggests it believes a recession will arrive in Q1 or Q2 of 2016.
But Greg’s analysis shows that a 2015 is a much likelier outcome.
Either way, none of this makes a difference to the government. Whether its Q3 2015, or Q2 2016, a recession is coming. The government may do everything in its power to delay it until after the recession.
For it, spending more becomes the easiest option. In any other year, that might be less practical for a government preaching fiscal restraint. But the government isn’t getting the help it needs from the private sector. And with an election on the line, preventing a recession is key to success at the polls.
Sadly, it probably won’t be enough to delay a recession. That’s how grim the outlook is on trade and investment data. But it’s still the Coalition government’s best hope.
Contributor, The Daily Reckoning
As one of Australia’s leading investment analysts, Greg says we’re on course for our first recession in 23 years this year.
In a free report, ‘Australian Recession 2015: Unavoidable’, Greg reveals how we’ve found ourselves in this position. Trade imbalances have been growing for the better part of a year. Government revenues are down, and household debt is up. It all adds up to a recession that’s coming sooner than you think.
But there is a silver lining in all this. There are actions you can take now to lessen the blows of the coming recession.
Download your free copy today to learn how to protect your wealth from the coming crash. To find out how to download his free report right now, click here.