8 Warning Signs Of A Recession And Why Goldman Sachs Thinks Australia Will Avoid One

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Australia faces a 20% chance of a recession, according to Goldman Sachs, which dropped its economic growth and currency forecasts for the nation this week.

Analysts now expect Australia’s economy to grow 2.0% this year and 1.9% next year, down from Goldman Sachs’ previous forecast of 2.4% and 2.7% respectively. The Australian dollar is expected to fall in value to A$/US$0.85 in 12 months time.

Goldman Sachs reports that the first half of next year will be the highest-risk period for the economy, noting that Australia faces “the highest probability [of a recession] in the post-war period that didn’t result in a subsequent recession outside of the global financial crisis”.

Analysts say the following factors could be early warning signs of a recession:

    • Sharp rises in real oil prices
      Prior spikes in the real trade-weighted exchange rate
      Deterioration in labour vacancy indicators
      Shocks to the terms of trade
      Over-investment by business in a key part of the economy
      Sharp slowdowns in household income growth
      Falling equity prices
      Fiscal position of the government
  • In a research note to clients this week, Goldman Sachs warned Australian investment was falling from historic highs, and policymakers were rapidly depleting their savings with little discernible impact on demand. Consumer sentiment has declined to August 2012 levels.

    Non-mining economic growth has remained at 0.7% year-on-year – barely changing since the end of the financial crisis – but will need to recover strongly if Australia is to avoid a recession early next year, when mining investment is expected to fall.

    “We believe there is still time for the economy to respond to the combination of better global growth, domestic policy stimulus, and a lower Australian dollar,” Goldman Sachs reports.

    “Should the A$ remain responsive to the rising risks of recession then a hard economic landing for Australia can still be avoided.”

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