Daily Commentary BY THE CURVE TEAM –

Record Run Coming to an End?

1st of June, 2020

This week we will find out if Australia’s record run will come to an end.

Australia is currently the enviable holder of the world record for the longest run without a recession. The record stretches almost 30 years. The record is based on the technical definition a recession which constitutes two negative quarters of growth.

The second quarter of growth this year is expected to be deeply negative to the tune of around 10%. It is then expected to be followed by a rebound which should mean growth will be positive in the third quarter. That means the record run hinges on what happens in the first quarter.

GDP partial indicators so far have been a little mixed with a bias to the downside. We will get more partial indicators this week before the final number is released on Wednesday. The market is currently expecting the economy will contract by 0.4% in the first quarter. Should that eventuate, Australia’s record will certainly be over when the Q2 data is released in early September.

But does all that really matter? The Australian economy has been underperforming for many years and has only been growing thanks to an increasing population. Per capita growth has been next to nothing for years with surging immigration boosting population growth accounting for most of the increase in GDP in recent years.

When the new normal emerges later this year after the crutches holding up the economy are removed, major policy reform will be required to generate a sustained uplift of growth and living standards. Record low rates precipitating further increases in debt or a return to high levels of immigration to prop up population growth are not long term solutions to an absence in sustainable improvements in productivity.

The RBA last week essentially said they have done all they can and it is now over to governments and fiscal policy to shoulder the load. While fiscal policy will help in the short run, significant policy reform will need to be at the fore over the years ahead if we want to challenge or extend our own  growth world record.

David Flanagan

Director - Interest Rate Markets