World Economy

Australia May Slip Into Recession

Australia May Slip Into RecessionAustralia May Slip Into Recession

Goldman Sachs is warning that Australia faces a one-in-three chance of a recession in the coming financial year, as a slump in business investment combines with stagnant wages and falling financial wealth to undermine consumption.

“A recession is not some remote probability, it currently stands as the greatest probability since the financial crisis,” the Goldman Sachs Australian economics team said in a research note, reported.

“Slower population growth, weak wage growth amid high levels of under-utilized labor and low yields on investment income have combined with a sharp decline in financial wealth and fragile levels of confidence.”

The warning stands in contrast to assurances by Treasurer Joe Hockey and officials from the Reserve Bank.

It follows a forecast by Citigroup that the world faced a 55% chance of a global recession sparked by a slump in economic growth in China.

Goldman Sachs said Australia might sidestep a recession thanks to rising volumes of mining exports, together with a further official interest rate cut and a fall in the Australian dollar to 67 cents against the greenback.

The firm said a further sharp decline in private business investment could push the country into a technical recession unless there was a rise in consumption.

“Should consumption growth in 2015-16 expand at the same pace that prevailed in 2014-15 and private business investment decline by 15% in 2015-16, then Australia would likely record two consecutive quarters of negative real GDP growth before mid-2016,” Goldman Sachs said.

It is 25 years since Australia last entered recession, in the September of 1990.

The downturn—dubbed “the recession we had to have” by then treasurer Paul Keating—pushed the unemployment rate up to nearly 11% and led to a sharp fall in house prices.

Fresh volatility on US markets and fears about the threat of a global recession have weighed heavily on Australian investors, consigning the stock market to its second worst day this year.

The benchmark ASX 200 index coughed up 2.4% Thursday—wiping $35 billion from the value of the nation’s biggest listed companies—after seemingly finding a floor earlier in the week.

It came after Wall Street retreated 1.5% overnight on Wednesday and as analysts raised their bets that the US would soon lift interest rates.

Such a move would effectively herald an end to the era of cheap debt, raising risks among emerging markets such as China, Brazil and Turkey that have gorged on historic low US borrowing costs.

“Just when you thought risk sentiment is on the mend, it unceremoniously crumbles in the US markets,” IG market strategist Bernard Aw said.