Australia has had a good run, with 24 years of uninterrupted growth and only a few rough patches. So are we due for a recession? Or will we glide past the end of the mining investment boom with only a period of subpar growth?
The economy has benefited a great deal from mining over the past decade, notably through investment in the construction and expansion of mines, and growing resource exports. Unfortunately, the price of many key Australian resource exports have been falling since 2011 and in the past 12 months, the pace of decline has accelerated. As a result, mining companies are scaling back their investment plans and government revenues are projected to decline, which will be a significant drag on growth in coming years.
Over the medium term, policymakers hope that the economy will rebalance to achieve broad, multi-sector growth through industries like healthcare, education, construction, financial and other services, but so far this is only happening at a very slow pace. Indeed, looking at the broad drivers of GDP growth (refer Figure 1), household spending is unusually weak at the moment, and both public investment and business investment are shrinking, which has left net exports—largely iron ore and coal—to do much of the heavy lifting for GDP. This means that if export growth were to fall, Australia would be at real risk of recession.
Figure 1 – Contribution to annual real GDP growth
Notes: The historical average covers Q4 1959 – present for all categories except business investment, which covers Q4 1985 – present.
Source: Thomson Reuters
For Australian investors, the elevated risk of recession implies a potential for Australian equities to underperform over the next several years, particularly given the heavy local market concentration in material sector stocks, which represent around 15% of the ASX 300. An economic slowdown is likely to impact the big banks, who have a strong exposure to the property market. This concentration risk is compounded for Australian investors, who have an unusually strong home equity bias. Investors typically hold more than 50% of their equity portfolio in the local market, even though Australia represents only 3% of global market capitalisation. Given these reasons, we would encourage investors to reduce home equity bias and increase global diversification.