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Is the Aussie Economy Faking It?

You may have noticed that things have been pretty good lately. The economy is booming. Unemployment is down. And market sentiment is, generally, pretty cheerful.

Overall, for the last few decades, Australia has truly been a place of sunshine and financial optimism.

The economic growth figures released on Wednesday came as no surprise to anyone. Our reputation as ‘the lucky country’ lives on.

The figures show that the Australian economy has had 27 years of recession-free growth. Not only that, but the results from this quarter mark the strongest annual expansion for nearly two years.

We’ve had our GDP grow 1.0 percent, our dollar has risen a quarter of a US cent, our economic growth rate is 3.1 percent, one million jobs have been created since 2016, and we are now first place in the G7 economic leader board.

By all accounts, we’re the envy of the world.

This unexpected and unprecedented growth is mainly thanks to expansion in investment and exports. Particularly the export and production of mining commodities like coal, natural gas and iron ore.

But before we bust out the champagne and orchestral jazz band in a Gatsby-esque national celebration, there’s a few disclaimers to consider about this, seemingly, never-ending growth.

A recession on the horizon?

Although business and government spending have been propping up the economy, the level of household consumption and debt remains a pressing concern.

The report released on Wednesday confirmed that consumers are gradually spending less at the shops. And although our GDP has grown 1.0 percent, only 0.18 of that came from consumer spending.

Considering that 60 percent of the nation’s economic output comes from consumers, this is far from a positive sign.

This drop in consumption is likely due to the fact that Australian consumers are grappling with a mountain of household debt at a time when wage growth is at a record low.

The Australian Bureau of Statistics (ABS) along with the Reserve Bank of Australia (RBA), have found that Australians now have some of the highest levels of household debt in the world. Currently, the household debt to disposable income ratio is sitting at 199.7 percent — with most of the debt being tied up in home mortgages.

Along with many other notable economists, Capital Economic’s chief economist, Paul Dale, was concerned that this lack of consumer spending would continue:

We fear that still-subdued real income growth and the weakening housing market will mean a lot of the softness in consumption lingers.

The weakening housing market is already apparent with the falling property prices in major cities like Melbourne and Sydney. Combined with the threat of rising interest rates, things could stand to get a lot worse.

Leading economists like Stephen Walters, a member of the Australian Institute of Company Directors (AICD), are also warning that the economy could be in for a tumble.

I think the overall message is that households need to brace themselves over the next five years at least that interest rates will be going up.’

Walters also cautioned that Australians shouldn’t be expecting any big pay rises over the next few years. He was confident that with our level of debt, low consumer spending, stagnant wage growth and the threat of rising interest rates, we should be preparing for a crisis sooner rather than later.

Australia will have a recession at some point. I think it’s probably at least two years away.’

This crisis could leave millions of Australians stranded. Especially considering that for the first time in history, less than half of all working Australians currently have a permanent full time job. Not only does this dampen the prospect of wage rises, but in the event of a crisis, it could leave the majority of workers without a sense of income security.

With all of these warnings, it may be said that the success we have enjoyed for so long is merely a mirage. A fantastical data-driven illusion that you shouldn’t be lured into a false sense of security by.

So instead of preparing for a party, you might want to bunker down and consider how to diversify your investment portfolio. Rather than have the crisis catch you off-guard, it’s much better to prepare for the worst.

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