Australia faces recession

With Covid gaining a foothold, strict lockdowns in place and low rates of vaccination, Australia looks vulnerable.

Millions of Australians are locked down. The stockmarket has reacted by hitting a record high. Australia has largely kept Covid-19 at bay thanks to tough border policies, but the virus is now gaining a foothold. At the end of June Sydney was placed under its strictest lockdown so far. The army was deployed this week to enforce the rules. 

A lockdown in Brisbane has also been extended. Officials are concerned about expanding clusters of the Delta variant. While cases are still low, Australia is vulnerable if things get out of control: a slow rollout means that just 15% of the population has been fully vaccinated. 

Stocks and property soar 

Asset prices tell a different story. The Reserve Bank of Australia, the central bank, slashed interest rates to just 0.1% last year, say Shane Wright and Jennifer Duke in The Sydney Morning Herald. That has helped drive “record high house values in almost every corner of the country”. 

Prices have risen by 16% over the past year, “the fastest increase in more than 25 years”. The renewed lockdowns mean even more stimulus is probably on the way. Stocks are also buoyant. The benchmark S&P/ASX 200 index hit a record high on Monday, boosted by Square’s $39bn bid for local star Afterpay (see page 11). The index has gained 12% so far this year, close to the global average gain. It is up by 55% since the nadir of March 2020. 

The Australian equity market is heavily weighted towards the financial and commodity sectors. Bank shares plunged in 2020 on fears that there would be “a sharp increase in customers defaulting on loans”, says Stuart Condie in The Wall Street Journal. The worries proved overdone. The banks set aside more cash than they needed to cover losses and their shares have soared. Commodities producers such as Rio Tinto have also been lifted by strong iron-ore prices.  

A commodities boom has saved Australia before. Exports to China helped the country dodge the worst of the global financial crisis. True to its “lucky country” moniker, it had enjoyed nearly 30 years without a recession. That record came to an end in the first half of 2020, but GDP then bounced back swiftly thanks to an apparently successful containment of the virus.  

Now there could be a double-dip recession, says Ben Butler in The Guardian. The strict lockdowns mean that the current quarter is already a write-off, while the economy may also shrink in the final three months of the year (a recession is defined as two consecutive quarters of falling GDP). Gareth Aird of Commonwealth Bank says he think “significant restrictions” will have to stay in place until 80% of the population is vaccinated. That could be “late October at the earliest”. Yet markets, high on easy money, seem barely to have noticed.

Recommended

Cryptocurrency roundup: Putin backs crypto-mining, and spoof McDonald’s coin takes off
Bitcoin & crypto

Cryptocurrency roundup: Putin backs crypto-mining, and spoof McDonald’s coin takes off

Saloni Sardana looks at the cryptocurrency stories that caught our eye this week.
28 Jan 2022
Are recession fears justified? Maybe it’s time to look on the bright side
Economy

Are recession fears justified? Maybe it’s time to look on the bright side

There's a lot to feel nervous about right now, and many people are worrying about an impending recession. But it's by no means certain, says John Step…
28 Jan 2022
Making money is about to get much harder
Investment strategy

Making money is about to get much harder

Soaring inflation, geopolitical risk, bubbly stockmarkets - getting a return on your investment is going to get much more difficult – but not impossib…
28 Jan 2022
How to invest in the chipmakers fixing the semiconductor shortage
Share tips

How to invest in the chipmakers fixing the semiconductor shortage

Last year’s chip crunch brought home how dependent the world is on these tiny pieces of silicon. Chipmakers are rushing to build new factories. Will t…
28 Jan 2022

Most Popular

Amazon halts plans to ban UK Visa credit card payments
Personal finance

Amazon halts plans to ban UK Visa credit card payments

Amazon has said that it is to shelve its proposed ban on UK customers making payments with Visa credit cards.
17 Jan 2022
Shareholder capitalism: why we must return power to listed companies’ ultimate owners
Investment strategy

Shareholder capitalism: why we must return power to listed companies’ ultimate owners

Under our system of shareholder capitalism it's not fund managers, it‘s the individual investors – the company's ultimate owners – who should be telli…
24 Jan 2022
Temple Bar’s Ian Lance and Nick Purves: the essence of value investing
Investment strategy

Temple Bar’s Ian Lance and Nick Purves: the essence of value investing

Ian Lance and Nick Purves of the Temple Bar investment trust explain the essence of “value investing” – buying something for less than its intrinsic v…
14 Jan 2022