For all the headwinds that constantly buffet it the Australian economy it continues to march toward the world record for the longest continuous period of economic growth, currently held by the Dutch at 103 quarters of consecutive growth.
So far Australia has racked up 94 straight quarters without a recession.
Australia’s performance is remarkable when you consider the swings that the global economy and Australia’s trading partners have been through over the past 24 years.
But London-based Longview Economics asks if Australia “structurally different from other economies such that it can achieve longer lasting phases of growth without any meaningful repercussions? Or, given the record length of this expansion, does a recession beckon?”
Special one-off factors have also been a key underpinning of Australia’s current record expansion. A long run-up in household indebtedness, a strong rise in house prices, a commodity super cycle & an associated China infrastructure boom have all combined to extend Australia’s economic expansion beyond the length of a normal cycle.
That sounds ominous.
Longview then says that “the key question becomes when does Australia roll over into recession and what triggers that event?”
Relying on “Kindleberger’s analysis of the history of bubbles (and booms)” Longview believes that it is the end of cheap money which will ultimately see Australia’s expansion end.
Once that cheap money begins to be removed, the boom then typically turns to bust. As such the key to forecasting the next Australian recession lies in forecasting the end of cheap money. This is especially true given that the other ‘non-housing’ drivers of this record long economic expansion have gone into reverse.
Key to the argument that Longview is making is that the availability of funds from offshore will hurt Australian banks’ ability to provide cheap funds for housing.
As the tightening of US monetary policy persists, though, upward pressure will come to bear on overseas funding costs for Australian banks, reflecting the linkages between Aussie yields, the US yields and the currency That funding only accounts for 15% of total bank funding (i.e. ~30% of GDP). As with all booms/busts, though, it’s the marginal buyer that sets the price. As such with marginal funding costs rising, the Aussie housing boom, the last key area of strength in the economy, should then turn to bust.
In short, Fed tightening could tip Australia into recession.
That’s Longviews view and they are putting their money where their mouth is, suggesting positions to clients including: short Aussie dollars, long Aussie bonds outright and relative to a short US Treasury position and also short the ASX versus the S&P 500.
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