Signs of Recession in Australia? Not yet!

Many individuals in Australia have been very concerned about whether Australia is in fact in a recession? This concern is attributed to several factors including the ratio between housing prices and overall household debt, the inability for Australians to contribute to their savings, the ever-increasing housing cost bubble within Australia, record lower interest rates, concerns over inflation, and overall global debt in terms of assets and investment opportunities. When considering whether Australia is headed for a recession, it is important to remember that these are mere economic trends and that there is a possibility to fix the market before it implodes into a recession. In order to gain a better understanding of the exact economic climate within Australia, review the information below.

 

Housing Prices vs. the Overall Household Debt

When anticipating whether Australia may be headed for a recession, economists typically look at the ratio between housing prices and the overall housing debt. The average Australian employee makes just shy of $20,000 AUD per year. This is quite a low average considering the cost of housing in Australia currently. When comparing the cost of housing, it is natural to see that the overall household debt tends to increase in order for individuals with lower salaries to be able to not only afford their housing, but the many other expenses associated with the high cost of living in Australia such as: food and transportation. Currently, household debt is 200% higher as a proportion of disposable household income on average and the average rental cost is between $660 and $1760 AUD per month.

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Lack of Savings by Australians

With housing prices and the overall household debt increasing, it is no surprise that fewer Australians are able to contribute to their savings. Putting so much investment into basic required living functions forces many Australians to be unable to save the capital they need to buy their own home, save for unexpected emergencies, invest in their children’s education or invest in private investment portfolios to grow their wealth. Another factor implicating savings is the high amount of credit card debt that adds on to the required living expenses of Australians. Overspending followed by credit card interest rates does not allow Australians to save the way they ought to.

 

Increase of Housing Bubble in Australia

The housing bubble within Australia is a separate issue to the housing prices versus household debt ratio because it relates to the extreme price increases that eventually have to bottom out. The danger with this is Australians who have taken out mortgages that they may not be able to afford in the long term. Overspending on housing is an issue that can cause foreclosures and a decreased value in real estate once the housing bubble bursts.

Lower Interest Rates

Internationally, there has been a trend to increase interest rates that directly affect mortgages. Australia has not followed this trend, which shows a tendency to lower the risk that financial institutions are allowed to take within Australia when they decide to issue mortgages to borrowers. The precautionary measures of the Australian government have many economists worried about the economic climate to come in the next few years.

Inflation Concerns

Since the global price of oil has been quite volatile in recent years, it has had a direct impact globally on developed countries in terms of inflation. The price of global oil increased 51% and the trade war regarding commodities has economists speculating the implication this count potentially have on the rapid growth of inflation. In 2017, both the US and the UK missed their target inflation goals by at least 1%. Other countries that were impacted by inflation were Canada and Japan whereas countries such as Venezuela have been impacted with astounding inflation rates of 4,000% resulting from the global oil unpredictability and mismanagement of government funds.

 

Concluding Remarks on the Subject

There is no doubt that Australia is currently exhibiting the signs of heading into a recession. Whether the Australian economy does actually head into a recession is directly tied to domestic fiscal decisions, but also international ones as well. Domestically, the high-priced housing market coupled with low average household incomes is troublesome for families to successfully be able to save their earnings. Instead, there is a higher tendency for the overall household debt to increase. Lower interest rates in Australia show the government’s steps to exercise caution towards lending institutions, yet the global spike in inflation is troubling due to the unpredictable price of oil.

Currently, Australia is not in a recession; however, there is a strong case to be made that a recession could occur if the status quo becomes more severe. Economists both within Australia and internationally are monitoring trends to see what will be in store for Australia’s economy in the next few years.