Get Ready for Tough Times in Australia

The rather tepid, mediocre economic data out of Australia, as of late might have made some happy, but the bottom is getting ready to fall out. This is causing many economists, like myself, to slash our growth forecasts.

Australia’s change from a resource boom, where commodities drove their economy, to a housing boom (on their east coast) has stalled. We will get even more trade shock and the missed opportunity to increase consumer confidence will lead to an anemic growth period in the near term.

Gross Domestic Product (GDP) growth should come in next year near 1.8 to 1.9 percent. Forecasts for this year are at 2.9 percent and the forecast for 2016 is slightly better at 2.1 percent. This will be supported by a slowdown in material growth coupled with worsening labor market prospects. Further, if we do not see more stimulus from the Reserve Bank of Australia (RBA) then we could fall into the first recession in nearly 25 years.

Recent labor sector numbers have not been promising. The Australian economy only added 24,100 jobs in October. Just over the expected 22,500. This comes after two straight months of losses. Retail sales, which came out earlier this week, also came in better than expected, up 1.2 percent from August. This means we have not seen a decrease in consumption.

This week, the RBA kept its growth forecast unchanged at 2.5-3.5 percent for 2015 and 2.75 to 4.25 percent in 2016. They feel that the continued losses in the mining sector will mean a 1.5 percent subtraction for the GDP in 2015. However, mining investment will continue to fall off sharply. The mining sector kept the Australian economy going over the last decade and through the global recession. This will drag the economy down further than what the RBA is predicting.

So far, the rest of the economy has not been strong enough to make up for the losses we will see in the mining sector. Also, households still have a great deal of debt to contend with. Which means consumer spending will eventually wane.

Do not expect the RBA to ride in on a white horse to support their economy anytime soon. They are more concerned with the increasing housing prices and low interest rates leading to a housing bubble. They are not very concerned with supporting the economy as housing continues to grow, retail sales are strong and the percentage of export to GDP remains strong. The problem is with the mining sector and with household debt. If consumers stop spending, then Australia will be in real trouble.