Reasons why Aussie recession will be severe
Some of the reasons why the coming Australian recession is likely to be severe:
COVID-19 has caused a massive shock to the consumer. Consumers have closed their purse ... people are not spending. Consumption is 56% of GDP. https://www.theglobaleconomy.com/Australia/household_consumption/ So by itself, the sharp fall in consumer spending seems highly likely to take Australia in a deep recession.
And the shock consumer's have had, from COVID-19 has changed (I believe) consumer sentiment quite drastically. Because of the historic extreme of household debt (see charts below), it has not taken much to put a lot of Australian's into financial stress.
"Research from NAB has found 40% of Australians have experienced some form of financial stress or hardship in the past three months." And this is before the impact of COVID-19 was felt.
'As living expenses rise but wage growth remains subdued, Australians are increasingly needing to overspend and dip into their savings. That was the key finding of ME Bank's latest "financial comfort" report, which surveyed 1,500 people about how they perceived their own financial well-being in the first half of 2018.The steepest decline was observed when people were asked how confident they felt about their short-term cash savings.The short answer appears to be "not very", as their level of confidence in that regard fell 3 per cent to 4.93 (out of 10), its lowest value in two years.'
"Housing stress continued to be a major issue for Australians with mortgages to repay — 45 per cent of households said they were using more than 30 per cent of their disposable income to pay off their home loans over the last half-year."
"While almost three-quarters (72 per cent) of renters were previously contributing over 30 per cent of their disposable income towards rent, this number dropped significantly to two-thirds (67 per cent) in the most recent survey." - but 67% is still a lot, and quickly becomes grave if you lose your job - such as in a recession - particularly because most people have very few savings to fall back on for a "rainy day".
After many years of ignoring this risk, COVID-19 has focused the minds of consumers, on their vulnerabilities in the event of economic down-turn .... and their financial vulnerability if the lose their job. (Note: "33 Million Americans Have Filed for Unemployment Since Start of Coronavirus Outbreak" 7/May/2020 https://time.com/5833555/us-unemployment-aid-coronavirus/ http://puzzlefinancialadvice.com.au/2020/AFR/200509_AFR_US_jobless_rate_is_highest_since_Great_Depression.pdf There has been a similar proportion of Australians losing their jobs over the same period. See chart below and also at this link. http://puzzlefinancialadvice.com.au/2020/Charts/200508_RBA_Australian_unemployment_forecast.jpg And because lockdown will continue in some form for at least 12-18months at least [ http://puzzlefinancialadvice.com.au/2020/V/200502_continued_limited_lockdown_for_12_to_18months.mp4 ], then we will almost certainly will remain in recession with high unemployment for that amount of time. Obviously for most, unemployment FORCES you to cut your spending) This will have been felt particularly acutely by those 1 million or more Australians who have not been working because of the COVID-19 crisis - and felt particularly acutely by the large proportion of Australians whose households are already experiencing financial stress, and households with very large mortgages.
In my opinion, this means that this COVID-19 crisis will cause long-term changes in consumer behaviour. Specifically, it will:
cause consumers to save more AND
cause consumers to consume less, having a substantial negative impact on GDP. This factor alone, I believe is now powerful enough to cause economic recession, and will be a powerful drag on economic "growth", for at least the next 5 year and possibly many more than 10 years to come.
Some articles of interest on the COVID-19 impact on consumer spending:
"COVID-19 is weaving a web of disruption around the globe, and consumers are feeling the effects. As consumers pinch pennies, their reduced spending could decimate many industries. On the other hand, a lucky few will benefit from increased spending in certain categories"
"As consumers grapple with uncertainty, their buying behavior becomes more erratic. What is clear however, is that they have reduced spending on all non-essential products and services."
LONDON, April 23, 2020 /PRNewswire/ -- The COVID-19 crisis is being defined by four distinct consumer behavior segments, according to the first edition of the EY Future Consumer Index, a survey of 4,859 people tracking consumer sentiment and behavior across the US, Canada, the UK, France and Germany.1 These are "Cut deep," "Stay calm, carry on," "Save and stockpile" and "Hibernate and spend". Consumers that fall into the "Cut deep" segment (27.3%) are spending less across all expense categories as the pandemic impacts employment; others representing the "Stay calm, carry on" category are continuing to spend as normal (26.2%). Most consumers (35.1%) represent the "Save and stockpile" segment, indicating that they feel pessimistic about the future, while consumers that fall into the "Hibernate and spend" segment (11.4%) are spending more across the board.
Australian Consumer Sentiment has crashed - almost to Global Financial Crisis levels. http://puzzlefinancialadvice.com.au/2020/Charts/200501_RBA_ChartPack_Consumer_Sentiment.PNG
But to make it worse, revenues from a lot of businesses have crashed .... so big corporates are not investing because of extreme business uncertainty. (Businesses are focused on surviving so they are not thinking of the medium-to-long term at all) and corporate investment is 24% of GDP. https://www.theglobaleconomy.com/Australia/capital_investment/ .
A recession will also cause a crash in most asset prices prices, which will kick off a range of other self-feeding second effects. For example, a crash in most asset prices will cause a major negative wealth effect, which will cause consumers to further cut spending, which in turn will deepen the recession.
So this will be a very deep recession ... deepest for a long time. And that is before the second order effects start kicking in, because for example, this recession will cause the household debt bubble to crash.
Part of the effects of this deep recession will be very high unemployment probably the highest since the 1930s Great Depression.
And high unemployment and deep recession will mean that:
The trend towards more people living alone will reverse ......... https://aifs.gov.au/sites/default/files/publication-documents/aft6.pdf starting a trend for shrinking demand for rental property and shrinking aggregate number of residences needed for Australia's population.
Also the kids in their 20s and early thirties, without savings and often without a job, will move back in with their parents (because they cannot afford to live separately), further shrinking demand for housing
So there are many factors that will reduce the demand for housing. And this will tilt the supply demand balance toward oversupply - causing a major fall in house prices - even before we consider the effect of the household debt bubble crash - a factor which will exacerbate these trends.
It is highly likely that the severe recession in Australia has already commenced - but the full damage that this recession is likely to cause, is as yet, not obvious to most. Most Australians do not yet realise what is about the hit them.
Noting that "recession" is technically defined as "2 quarters of negative GDP growth", technically we MIGHT be out of recession "sooner", but it will not feel like it. I think you should be preparing for Australian GDP levels at significantly lower levels that pre-COVID for an extended period - probably years. This would also mean that unemployment levels are likely to remain elevated for quite a long time - and therefore that the RBA's worst case unemployment forecast, may prove to be too optimistic.
Some related articles:
"Chief financial officer Alex Harvey said the company's base case – with a likelihood of slightly more than 50 per cent – was for a 9 per cent fall in GDP by mid-year sparking an surge in unemployment to 9 per cent and a 15 per cent slide in house prices. There was slightly less than even chance of a less optimistic scenario – a jobless rate of 11 per cent and a 30 per cent crash in the property market – occurring."
Australian Consumer Sentiment has plummeted as a result of the COVID-19 crisis. https://www.rba.gov.au/chart-pack/pdf/chart-pack.pdf
Australian Unemployment Rate http://puzzlefinancialadvice.com.au/2020/AFR/200509_AFR_Shops_cafes_officework_interstate_travel_by_July.pdf