Australia Dodges Recession Again! Still There Are Dangers!

Good afternoon everyone.

Today Australia reported on its GDP figure for the Oct-Dec 16 quarter and it was a positive result (as expected) at a growth of 1.1%. This followed a very unanticipated -0.5% drop in GDP from the Jul-Sept 16 quarter. However, it must be said the Reserve Bank reduced interest rates again in both July & August 2016 which would have assisted the GDP growth in the Oct-Dec 16 quarter.

So the Reserve Bank did it again! However, the Australian economy has been financed by accumulating household debt since 2008. This was fuelled by twenty interest rate cuts peaking at 6.25% all the way down to 1.5%. Yes that is twenty rate cuts from the peak! Now construction is our biggest industry and household debt has grown from 150% to 210% of GDP. Most of us are now shaking our heads at where this has taken our property market. We are dizzy. There are now 500 square meter blocks forty five kilometres (45 km) from Sydney CBD selling for $500,000 (no house).

At the same time our unemployment levels are uninspiring, our wages growth non-existent & our government deficits continually rising. Recently, Australia rose its debt ceiling to $500 billion. Sound familiar! This is not to say we are anywhere near as bad as say most of Europe or the USA, however it is on the same track at a smaller scale. This is a purposely orchestrated failed economic model has been adopted by nearly every developed country. The FINAL result is no jobs or no wages growth, massive government deficits, interest rates that pay 0% to depositors if you’re lucky, high property prices compared to incomes & banks on the brink of collapsing or constantly requiring more liquidity. Brilliant!

Or course this could never happen in Australia? Well at least one bank is very nervous. The Commonwealth Bank this month ceased all re-financing from customers coming from other banks. This represents about 33% of all of their new loans and a very significant loss of income.

Today’s GDP figures are simply a product of more interest rate cuts and provide only temporary benefits. A much needed reality check that these economic policies don’t work is coming very soon and the trend is still on the downside and it is only a matter of time before it all starts to unravel. Of course it can be delayed by more interest cuts all the way to zero and the Reserve Bank along with other central banks are irresponsible enough to do it even if it creates an even bigger asset bubble.

On a positive side it will not be the end of the world. Economic downturns provide a much needed adjustment to over confident borrowings. Also, if you position yourself financially there are great opportunities where you can prosper from a recession. In addition, long term Australia is solid. You can continue to invest, however your investment strategy will need to be different in this economic upside down world.

We will be running a series of seminars around Australia from April 2017 providing great insights for individuals to customise their wealth strategies that compliments their needs but at the same time not ignoring the greater economic forces at play.

So I will keep you all posted for our seminar dates.

Until then have a great day.

Lawrie Carrozza