Is Australia headed for a recession?

Does Australia face a recession with China growth slowing?

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

According to former Greek finance minister Yanis Varoufakis, Australia is most certainly headed for a recession thanks to slowing growth in China and weak domestic investment.

Mr Varoufakis has told Fairfax Media that China was crucial to Australia's fortunes, but the world's second-largest economy was "not at the stage of development where it can continue to defy the global deflationary atmosphere."

He continued, "There will be a recession in Australia, because of the collapse of investment and because of the collapse of animal spirits – and this is because of what's happening in China."

But he also added that some recessions are necessary, "a bit like bushfires that clear out the forest, and help with the regeneration".

He's certainly right about China being essential for our growth. The country takes most of our exports, including our two major exports iron ore and coal. Both commodities face the likelihood of stagnant low prices for many years following the resources boom of the past several years.

That means lower tax revenues for Australia unless other parts of the economy are growing strongly and taking up the slack from the declining resources sector. So far, that appears to be taking longer than expected.

Mining investment has fallen significantly and continues to fall, with forecasts suggesting it won't hit bottom until 2018. Bad news for the mining services sector. Building construction has taken up some of the slack, but business investment for the three months to the end of September unexpectedly fell by 9.2% compared to the June quarter. Mining was down 10%, but manufacturing was up nearly 7% – helped by the falling Australian dollar.

On the upside, companies' operating profits and inventories were better than expected, and unemployment remains low, actually falling to 5.9% last quarter. Interest rates remain low, and are expected to remain low, possibly right throughout 2016, and the Australian dollar at 72 US cents makes exports attractive, while bringing in overseas visitors. Great news for tourism operators.

Australia's big four banks Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) have all recapitalised and are now stronger too.

At some stage, it's inevitable that Australia will see a recession. After 23 years of uninterrupted growth, the chances of a recession occurring rise, but personally, I can't see it happening anytime soon.

Foolish takeaway

Unless there's a major unforeseen global event that affects Australia, we won't be seeing a recession for some time – despite the views of a number of people – Mr Varoufakis included.

Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ Investing

A white and black robot in the form of a human being stands in front of a green graphic holding a laptop and discussing robotics and automation ASX shares
Technology Shares

Joining the revolution: How I'd invest in ASX AI shares right now

Advances in artificial intelligence (AI) could usher in a new industrial revolution. Here’s how you can invest in it.

Read more »

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »