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Remember when the headlines were filled with predictions of an imminent recession in Australia?
Economists and commentators were almost unanimous in their gloomy forecasts: with interest rates rising sharply, the economy was expected to stall, and unemployment was projected to climb.
Many of these predictions made sense-higher interest rates typically slow consumer spending, and in turn, cool down the economy.
But as we look around today, that dreaded recession has not materialized, at least not in the way most expected.
So, what happened?
Why didn't Australia fall into a recession as predicted?
And what does it mean for us, given that we are technically in a per capita recession?
Let's dive into the details.
Australia's economic resilience
Australia's economy has proven remarkably resilient, defying the predictions of a broad-based recession.
The latest GDP figures show that the economy grew by 0.4% in the June quarter of 2024, following similar growth in the March quarter.
Over the year, GDP rose by 2.1%, which is modest but still a far cry from the negative growth that defines a recession.
The primary driver behind this resilience appears to be strong exports and robust government spending, which have helped offset the slowdown in consumer spending due to higher interest rates.
Another crucial factor has been the labour market.
Unemployment has remained relatively low, hovering around 3.7%, which is significantly below historical averages.
Despite higher borrowing costs and squeezed household budgets, businesses have been reluctant to shed staff, possibly due to the tight labour market and the challenge of finding skilled workers.
This employment stability has provided a buffer for many households, keeping the economy afloat.
The per capita recession: a less talked about reality
While the headline GDP figures suggest that the economy is growing, the story is different when you look at GDP on a per capita basis.
A per capita recession occurs when economic growth doesn't keep pace with population growth, leading to a decline in average living standards.
This is exactly what Australia is experiencing now.
On a per capita basis, the economy has contracted for six consecutive quarters.
According to the latest data, Australia's per capita GDP fell by 0.3% in the June quarter, following a 0.2% decline in the March quarter.
This means that while the overall size of the economy is still growing, the average Australian is effectively getting poorer.
The implications of a per capita recession are significant-it can lead to a sense of economic stagnation and put pressure on living standards, even if the broader economy appears to be doing well.
As a result of the per capita recession, household disposable income has been shrinking.
It fell another 0.2% in the June quarter of 2024, and overall, it has declined by 8.2% from its peak.
The reduction in household disposable income per capita is unprecedented, marking the steepest decline globally over the last two years
In turn, household consumption fell by 0.2% in the June quarter, the weakest growth rate since the COVID-19 lockdowns in the September quarter of 2021 and our household savings rate has plummeted.
Not surprisingly, discretionary spending fell 1.1% over the last quarter, driven by services and partly offset by goods.
Transport services (-4.4%) and hotels cafes and restaurants (-1.5%) were the largest detractors, reversing their strength in March, though they remain at elevated levels.
Why didn't the broader recession happen?
Several factors have shielded the economy from a more severe downturn:
- Strong Export Performance: Australia has benefited from strong global demand for its key exports, such as iron ore, coal, and LNG. This export income has been a major support for the economy, helping to offset weaker domestic demand.
- Government Spending: Fiscal policy has played a supportive role, with government spending on infrastructure and public services providing a much-needed boost to economic activity.
- Household Savings Buffer: Many households entered this period of rising interest rates with substantial savings buffers, built up during the pandemic when spending opportunities were limited, and government support was generous. While these savings are being eroded, they have helped cushion the impact of higher mortgage repayments and living costs.
- Labour Market Strength: As mentioned earlier, the strength of the labour market has been a critical factor. Despite the challenges, employment remains strong, which has supported household incomes and consumer spending.
The challenges ahead
While Australia has avoided a broad-based recession so far, the economic outlook remains challenging.
High interest rates continue to weigh on household budgets, and the full impact of these rate hikes is still working its way through the economy.
Consumer confidence remains fragile and that's one of the reasons many people are not making big investment decisions like moving house or buying an investment property.
Moreover, the per capita recession highlights a growing disconnect between overall economic performance and individual prosperity.
What does this mean for property investors?
For property investors, the current environment presents a mixed bag of opportunities and risks.
On one hand, the resilience of the economy and the strong labour market are positives.
On the other hand, the per capita recession suggests that economic gains will not be evenly distributed, which is impacting consumer sentiment and spending power in certain segments of the market.
Despite all these challenges, our property markets are still growing but remain very fragmented, with some states outperforming others.
For investors with a secure job and a solid financial base, the current market conditions present a unique opportunity.
By taking a long-term view, focusing on high-quality assets, and making strategic purchases while others are hesitant, these investors can build wealth and position themselves for future success.
It's about seeing beyond the immediate challenges and recognising the potential for growth and value creation over the long haul.
And the per capita recession also underscores the importance of investing in areas where there is still strong economic and wage growth and avoiding areas where both owner occupiers and tenants are "one week away from broke."
In conclusion, while the anticipated recession hasn't hit Australia, the per capita recession serves as a reminder that not all growth is created equal.
Investors need to be discerning, looking beyond the headline numbers and focusing on the underlying drivers of demand and supply in the property market.
Image via Freepik
