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CHARTS: Will the decline in business spending lead to a recession in Australia?

Image: Paula Bronstein / Getty Images.

Here’s a great chart from Macquarie Bank that shows the expected decline in Australian business spending in the year ahead.

It shows business investment as a percentage of GDP going back to 1959. As you can see the current decline in expenditure, which we’ve highlighted, is huge compared to previous falls in business spending.

What it also shows is declines of this magnitude often correspond with Australian recessions. The last comparable decline of this magnitude occurred in 1991, the last time the Australian economy was in recession.

While this doesn’t automatically imply that a recession is going to occur in Australia next year, given that substantial falls in spending often correspond with declines in economic output, it’s no wonder the fall is getting plenty of attention.

It also explains why the RBA and government are providing incentives to non-mining sectors to help mitigate the dramatic drop in mining sector investment expected in the years ahead.

Based on a further 0.25% interest rate cut from the RBA and a “major” depreciation in the Australian dollar, Macquarie expects that the economy will continue to grow “at a pace that is more subdued relative to the RBA’s May Statement on Monetary Policy forecasts”. However, they warn that without these complementary drivers, “the growth outlook is very challenged”.

Here’s a chart on the economic growth trajectory they expect in the period ahead, compared to that of the RBA.

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