The NAB says there's a 'small possibility' Australia might fall into recession

Photo: Jose Luis Roca/AFP/Getty Images

The NAB says Australian economic growth likely fell in the first three months of the year, forecasting a decline of 0.1%.

“Economic partials point to a modest contraction in real GDP,” said Alan Oster, chief economist at the NAB.

“This would be the second contraction in three quarters, following the strong growth of 1.1% in Q4 2016 and decline of 0.5% in Q3 2016.”

Oster says that such an outcome would see year-on-year growth tumble to 1.3%, the lowest level since the September quarter 2009.

Here’s his full assessment on why the economy is likely to contract, and why there’s a risk that Australia may fall into a technical recession:

On the upside, business investment looks to have been more encouraging this quarter and is no longer dragging on economic growth, while business conditions remain elevated. More problematic however is the slowdown in household consumption amidst poor wages and household income growth, albeit again there are some weather-related effects here of which some have already reversed. Should this continue, it is unlikely that forecasts of 3%+ growth from Treasury and the RBA will be met in the near term, particularly when LNG exports start to flatten off from 2018. The fall in dwelling construction this quarter suggests some risk that the dwelling construction cycle has peaked a little earlier than expected, although weather is also a likely factor and it’s more likely to suggest a more elongated cycle. Our forecasts assume some further modest growth in 2017 before peaking in 2018. There is also some small possibility of a negative GDP print in Q2 which would take Australia into technical — but not real — recession, given the hit to coal exports from Cyclone Debbie, although there should be enough offset from LNG exports and government spending to keep GDP in the black.

While the NAB’s preliminary forecast is for negative economic growth in the March quarter, there’s still a large number of inputs to come including net-exports, inventories, government investment, company profits and the biggest of them all, household consumption.

They have the potential to shift expectations for growth dramatically in both directions.

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