Wednesday, November 26, 2008

No Recession… Yet.

Despite all the continuing doom and gloom around the world, Australia can still expect to weather the storm better than most. So we have been told by our government, our opposition, our business leaders, and our economic experts. We have also been told by the O.E.C.D. that while the rest of the world is slipping into recession, Australia will continue to experience economic growth at around 1.7%. That’s not quite as good as our own Treasury forecast of 2%, but still good news.

At the same time, the O.E.C.D. is still warning Australia of the risk of a further decline in house prices. Such declines have already hit the United States, Britain and Europe fairly hard, and there are reasons to believe similar falls could happen here. The most significant indicator in this regard is the ratio between average house prices and average incomes. Here in Australia, the relative price of housing is the fourth highest in the O.E.C.D.

This is a measure of the housing affordability crisis which until recently was receiving a great deal of attention. Now that the larger Global Financial Crisis is commanding most of the attention, housing affordability has receded a little from the spotlight but it still remains an unresolved issue for Australia. Where other countries have experienced relatively rapid falls in house values, other factors are at play to prevent that here in Australia.

Unlike the United States and Britain, Australia has a significant undersupply of housing along with continued growth in demand. While that is the case, prices will continue to be propped up by those conditions. It is more likely that prices will remain relatively flat for a protracted period while the rest of the economy, that is wages and prices, catch up to restore the balance. This is what all the experts are talking about when they mention a soft landing.

Of course, no crystal ball gazing can come with a guarantee. So far, all the experts have failed to correctly predict the onset of the financial crisis, the collapse of banks, the rout on the share market, that collapse of commodities prices, and the impact of global conditions on Australia. It’s always possible that they can be wrong again, and our soft landing could turn bumpy.

The key factor which will determine this is unemployment. While official forecasts are still predicting a relatively mild increase in unemployment, any increase will feed into the risk of recession. The higher the unemployment, the slower the economy will become, and the more people will default on their mortgages. If that spiral takes hold it will precipitate a more dramatic fall in house prices as mortgagee sales become more common, and the more likely a recession becomes.

Once again, it is crucial that our government remains prepared to step in to support the most vulnerable in our community, providing the twin benefit helping ordinary families at the same time as helping the economy. It’s also a good reason for the government to stop pretending that a budget deficit would be a bad thing.

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