Friday, November 27, 2015

Is Australian heading for a recession? Economist Frank Gelber says "no"

Is Australia heading towards a recession after around 25 years of unbroken economic growth?

That's the big question after the fast unraveling mining boom has seen business investment take its biggest dive since records began in 1989.

Listen to my interview with BIS Shrapnel chief economist Frank Gelber

With capital expenditure - or CAPEX - down 9.2 percent in the third quarter, the light at the end of the tunnel could be a long awaited recovery in local manufacturing and services.

Listen to Peter Ryan's reading of the business investment figures from yesterday's edition of The World Today

But there's one critical factor - maintaining a low or even lower Australian dollar which today is hovering at above US$0.72.

Frank Gelber, chief economist the the forecasting group BIS Shrapnel, does not believe the biggest business investment crash since records began in 1989 is enough to push the Australian economy over the edge into a recession.

But he warns Australia will continue to be rattled by falling investment in mining for a number of years yet.

"We're about 12 percent through a 60 percent decline in mining investment and that will dominate business investment figures over the next two years until we get to the bottom," Mr Gelber told The World Today.

"But we already have the seeds for the recovery in the lower dollar which will improve the prospects for trade exposed industries - tourism, education services, agriculture, business services and even manufacturing."

But Frank Gelber has one important caveat to Australia's non mining sector recovering - the direction of the Australian dollar.

"It's absolutely critical. If you talk about the non mining sector demand, profit and investments have been weak since the GFC (global financial crisis)," Mr Gelber said.

"And it will taker another few years for it to start to pick up but because of the low dollar the first sectors to recover will be those trade exposed industries which have effectively been in recession  for a decade for the period that the dollar was too high.

"Now they're going to have to spend money on refurbishment and then later investment which will start to broaden the recovery through the services sectors into construction and we will see a spin off into other non mining sectors which will gradually build momentum."

However, Frank Gelber says a much lower Australian dollar will be required to kickstart manufacturing which has seen Holden, Toyota and Ford recently announce plant closures - all decisions made when the dollar was at parity with the US currency.

But despite the uncertain outlook and the important of a consistently low dollar, Frank Gelber does not believe Australia is about to experience its first recession in a quarter of a century.

"No. We're going to have a soft economy until we finish the transition from the mining boom. It's another two years before we get there, probably three before we see non mining picking up."

The collapse in business investment makes next weeks official economic growth figures (GDP for the third quarter) a bigger event than it already and underscore the long term challenges as the Reserve Bank and Treasurer Scott Morrison manage the transition from the biggest mining boom in 150 years.

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