This week, Australians entered their 25th straight year without a recession. They ought to enjoy it, because they probably won't make it to a 26th.
Given the economic slowdown in China, Australia's biggest export market, it shouldn't come as a surprise that the Australian economy is struggling with weak wages, high household debt, and tepid job growth. The government says it expects a 25 percent drop in business capital expenditures in the year ending June 2016.
It's clear enough that recession is coming for Australia. The question is whether Australians are ready for it.
No nation is ever fully prepared for negative growth and falling wages, but Australia might be an extreme case. Residents of Sydney in their 20s or early 30s have never experienced a recession firsthand. "It's been so long since the last one that a whole generation might not even know what to expect," says Stephen Halmarick of Colonial First State Global Asset Management.
Although millennials may suffer the most from an economic downturn, they're not the ones who bear primary responsibility for it. A quarter of a century of uninterrupted growth "bred a degree of complacency among managers of firms, among employees, and among voters and politicians," says economist Saul Eslake, formerly with Bank of America Merrill Lynch. Australia's political leaders were quick to forget the national economy required constant tweaking to stay competitive in a region dominated by China.
Tony Abbott is the perfect example of a prime minister content to rely on past momentum, even as the costs of inaction mount. His policies have been devoid of any ideas to increase innovation and productivity and create jobs outside the natural resources sector. (He also turned his nation from a leader in the global fight against climate change into a laggard.) Abbott's complacency, says Konstantinos Venetis of Lombard Street Research, means "Australia's economic rebalancing is still in its infancy" even as Chinese demand for iron ore, copper and other Australian commodities evaporates.
But the current government doesn't deserve all the blame. Australia's living-off-past-momentum ethos took hold under John Howard, prime minister from 1996 to 2007. It intensified in 2008 as Wall Street's meltdown sent contagion Australia's way. Then-prime minister Kevin Rudd responded with short term measures, but initiated few long term adjustments for the national economy. “The fact that we did get out of the global financial crisis without being scathed probably was a liability in the sense of there being no impetus to reform,” David Burchell of University Western Sydney told Bloomberg News. “In comparison with previous decades, there’s also a lack of government leadership on promoting change.”
Abbott's treasurer, Joe Hockey, takes exception to such views. "We have the capacity to do what is necessary to keep the Australian economy going through a record run," he told Bloomberg News on Tuesday. "We’ve got good job creation. We still want to get the unemployment rate down." Those are admirable ambitions, but he didn't explain how his government intended to achieve them.
The government's policy drift has put Australia's central bank in the driver's seat -- and in a bind. The risks emanating from Greece probably have the Reserve Bank of Australia tempted to cut its already record-low 2 percent interest rate. But that might stoke new property booms in Sydney and other cities, which threatens to push homeownership out of the reach of millennials. RBA Governor Glenn Stevens has said home prices in the Australia’s most populous city are "crazy," and few young Australians would disagree.
Additional monetary stimulus, in the absence of economic growth, could also dent investment returns on the stock market. Dividend ratios have jumped to more than 70 percent from 55 percent in the past four years, Venetis says, even as corporate earnings have decelerated along with national economic growth (currently 2.3 percent). These high yields have helped the ASX200 stock index ease its transition from the so-called commodity supercycle fueled by the rise of the BRICs -- Brazil, Russia, India and China. But those returns may not be sustainable. "Risks to corporate earnings from a fragile macro backdrop," Venetis says, "are on the rise, challenging the sustainability of the Australian market's generous dividends."
As dividends and shares cool, Australia's investors may turn to betting on property. They would be joined by millionaires from mainland China, who have been snapping up Australian real estate and adding to already inflated property prices. (Those purchases may accelerate with the recent signing of a free trade agreement between Canberra and Beijing.)
That means Australia's millennials may have to get used to the idea of living with mom and dad for the foreseeable future. That's not the future they were promised. But as Australia heads toward recession, they'll have to learn to get used to it.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
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