Dear Reader,
The R word is everywhere today.
Something a central bank or politician wouldn’t dare whisper this time last year, is now splashed across the headlines.
News of the official recession breaking caused my phone to light up like a Christmas tree. The tumultuous year has turned my phone into a default harbinger of economic truth sifting…
It was a mix of despair, resignation, and fear.
‘It was inevitable.’
‘So I guess it gets really tough from here.’
‘Meh what else could go wrong in 2020. Bottoms up ladies.’
I’d wager the ‘official’ declaration of a recession didn’t catch anyone by surprise. We all knew this was coming back in March this year.
Given that most of my social circle is a couple of ticks either side of 40, those raised in Australia have absolutely no clue what a recession looks like.
In fact, the majority of us were kids the time the last one found its way to Australia. I remember more about the Gulf War flashing up on the news in the early 90s than I do about Australia’s last recession.
Here’s the thing.
The 2020 Great Recession is going to be completely different to the last one…
Simply because the Aussie economy wasn’t in great shape to begin with.
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Already broke
Long-time readers of The Daily Reckoning Australia know I’ve spent the better part of two years talking about a looming Aussie recession.
If you follow private consumption data like I do, the numbers were pretty grim by the start of 2018.
In fact we actually entered a per capita recession in 2019. That’s where population growth is removed and output per person declines for two back-to-back quarters.
When you look at the economy on an individual basis, consumers were already weary and spending less.
Throw in stagnant wage growth, inflation data that doesn’t match with individual expenses, and a heavily indebted population…future consumption was already looking strained.
What makes this new recession different to the last one, is we don’t have the ability to grow out of it with private credit consumption.
A traditional favourite of politicians and central banks alike. They attempt to smooth out the business cycle with their meddling.
Issuing cheap credit, encouraging debt — and granted there were some major structural reforms — eased Aussies out of the 1991 recession and gave us almost three decades of uninterrupted prosperity.
This time around though, central bankers and pollies will beef up the meddling which is likely it will have less impact.
Last week I mentioned that the head honchos in Canberra were already looking at ways to introduce a ‘chapter 11’ style bankruptcy laws in Australia, to ease the burden for businesses as they default on their loans.
On a similar note, the ABC reported that there were not enough liquidators to deal with corporate defaults.
A wave of debt defaults is predicated from the private sector.
But a more telling sign of how different this recession is came from the RBA’s debt package to the banks back in March…
Central bank intervention…for the banks
The mammoth intervention into the Aussie economy began way back in March.
The Reserve Bank of Australia announced a $200 billion package for commercial banks as the ‘rona reached our shores and we were shut inside.
To date only $52 billion of that has been drawn down by our banks.
Now with the official data rolling in, the RBA expect almost the full amount to be drawn down of the next year.
What you need to know though, is this isn’t a $200 billion package for the little guy.
These billions are a lifeline for the banks.
Don’t get me wrong, that’s not what they’re calling it. Instead it’s being labelled as a way Australia ‘can build its way out of a recession’.
When in reality, this cheap line of credit from our central bank is really about preventing commercial banks increasing interest rates or going overseas for the debt.
The biggest concern of the RBA right now is propping the banks up.
Increasing interest rates to customers could spell economic disaster for our entire banking system. Aussie banks are highly leveraged to property. A solid chunk of those property loans is due to roll over from interest only to interest and principal repayments over the next couple years too.
In other words, debt repayments are set to rise right as Australia finds itself in a once a century economic downturn…
…one that will take almost a decade to recover from.
The RBA throwing out the lifeline to the banks is admitting how sensitive most Australians are to even the smallest increase in rates.
The artificial invention from the RBA is a worrying sign.
The bad news didn’t come from the fall in GDP.
The bad news is all the variables we can’t foresee today.
Until next time,
 |
Shae Russell,
Editor, The Daily Reckoning Australia
PS: I predict five knock-on effects of the recent market crash that could be even bigger threats to the average investor’s wealth than the crash itself. Find out more here.
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