Recession?

Opinion

The Lizard King has spent many a long hot summer under the hot Aussie sun and shivered through many a chilly winter. He’s seen markets go up and down, booms come and go and almost every economic variable in between. However, the Lizard King was only a young Lizard Prince when he last experienced a recession in Australia.

That’s right, despite the great financial crisis, pandemics, Sept 11, the Asian financial crisis, and all manner of other shocks, Australia last experienced a recession in 1991, now 31 years ago! At the time, interest rates were hiked to slow down inflation. Unemployment hit 10.5%. Interest rates hit 17%. In today’s economic times, these are eyewatering numbers.

We are currently at full employment, with unemployment at a near-record low of 3.5% and youth unemployment at an all-time low. Interest rates are only 1.85%, having risen from an all-time low!

These are extremely good economic times. And in such good times, it is normal for interest rates to rise. Interest rates were only set at record low levels in an effort to STIMULATE inflation and growth. Well, guess what –it worked! Now it is only normal to raise interest rates from emergency low settings to more normal levels.

So it is puzzling to the Lizard King to hear of doom and gloom forecasts of “recessions” and “busts”. That’s a lot of people to enter the dole queues from today’s position of record employment. That would mean that every job vacancy (there are currently several times as many jobs as people looking for them) would no longer exist. Someone would mysteriously fill the positions at the cafes, bars and hospitality venues that are currently unfilled. The massive construction & mining projects would be shelved or completed by imaginary tradies. The green energy transition construction boom would have been ‘sorted’ by someone else. All our youth would be back on the streets, unable to find anyone to give them an honest day’s work. [sometimes I wish there was a bust so today’s youth would realise that a job is a privilege, not a right!].

As an aside, it is interesting to hear the new Federal government talk about the woeful economic mess they have inherited with record low unemployment!

The clamour to raise rates is quite ironic to the Lizard King. Inflation has been at <2% for so long that in mid-2021, mid-pandemic, central banks unanimously declared rates would be at low emergency settings until “at least 2024”. Let us ponder that. This declaration remained until at least Feb 2022. Then in April 2022, inflation spiked and ever since there has been a clamour to raise rates, and now the same central bankers are predicting a recession. Why did they leave it so long to change their tune? Who is going to believe them next time?

Australian GDP growth rate has been between ~1.5% and 5% since the last recession in 1991. Then the pandemic has dramatically skewed figures resulting in a -5% drop followed by a ~10% rise. Its no surprise then that inflation has risen sharply. Demand drivers and supply chain issues not to mention staff shortages from Covid, have all lead to higher prices. So what happens if this inflation rise is only temporary or transitory and normal forces of supply and demand eventually resume their normal balance. Interest rates SHOULD rise to a normal level and GDP growth should taper off. Property prices should come off with higher interest rates and possibly unemployment rates should rise. But a recession with 10% unemployment? 17% interest rates? I’m not buying it, certainly not yet. Try finding a tradie to fix a leaky tap these days, or find a field exploration assistant for less than $500 a day!

The trouble is that the US sneezes, and we get a cold. The US market seems to start sneezing at the slightest hint of an interest rate rise, so we have ended up with a roller coaster ride of ups (Nov – Apr) and downs (June-Aug). This is just a repeat of the “taper tantrums” and “dot plot” swings of a few years ago when the slightest utterance from the fed as to the future direction of interest rates caused severe market ructions. And again, this week, Chairman Jerome Powell addressed the Jacksonhole Forum, confirming that the Fed will do “whatever it takes” to tame inflation. This spooked the US markets, which are down about 6% in 4 ½ sessions since then. Sentiment swings from euphoria to dumpster diving in a matter of days. Why are we so fickle? Australian mining companies are making hay while the commodity sun shines, prices are up (e.g. lithium is up 500%), and the EV transition and geo-political alliance lines drive consumers to Australia’s mining mecca en masse. This is seriously a once-in-a-generation boom for Australia, particularly WA. So let us take that recession talk with a grain of salt, get used to average interest rates and get on with it!

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