Australia faces recession

Sydney has been placed under its strictest lockdown so far

(Image credit: © Xinhua/Shutterstock)

published 6 August 2021

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”.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

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.

Explore More

Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.

Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.

He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.

Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.