Is Australia spiralling towards a recession? Warning over house prices

Is Australia spiralling towards a recession? Experts warn this year ‘will be a struggle’ as house prices continue to plunge and an election looms

  • IMF cut its growth forecasts on Monday due to weak growth and trade tensions
  • Experts have said ‘the risks are there’ for Australia to fall to negative growth 
  • The main threat is the housing market which could drop by 20 per cent this year 

The Australian economy ‘will struggle this year,’ an expert has warned after the International Monetary Fund downgraded its global growth forecast.

The IMF on Monday cut its world economic growth forecasts for 2019 and 2020 due to weakness in Europe and some emerging markets and amid global trade tensions.

It predicted the global economy to grow at 3.5 percent in 2019 and 3.6 percent in 2020, down 0.2 and 0.1 percentage points respectively from last October’s forecasts. 

The Australian economy ‘will struggle this year,’ an expert has warned after the International Monetary Fund downgraded its global growth forecast (stock image) 

The new figures were contained in the World Economic Outlook published by IMF chief Christine Lagarde (pictured on Monday in Davos) 

The new figures were contained in the World Economic Outlook published by IMF chief Christine Lagarde (pictured on Monday in Davos) 

Slowing global growth is likely to affect business confidence in Australia, particularly for exporters, and, coupled with domestic factors such as a housing downturn, could push the country towards negative growth, according to industry experts.

Shane Oliver at AMP Capital said ‘the risks are there’ for Australia to suffer a recession.

‘Australia will struggle this year,’ he told Daily Mail Australia.

‘This is mostly due to homegrown factors such as the downturn in the housing market, the mining investment downturn and uncertainty over energy regulation and in the banking sector.’

‘The upcoming general election is also creating uncertainty for housing and business.’

In 2018, Australian domestic product grew by only 2.8 per cent, the weakest expansion in two years and well below the 3.5 per cent forecast by the RBA.  

The IMF's latest forecasts (pictured) for how the world economy is expected to perform

The IMF’s latest forecasts (pictured) for how the world economy is expected to perform

The government has warned that the Australian economy faces ‘storm clouds’ ahead and last week the Australian Business Group said policymakers need to take action to stave off recession.

It warned of ‘a grave risk that a blend of denial and complacency will see this downward drift continue’. 

Mr Oliver echoed this warning, saying: ‘There is a risk that policymakers are too complacent. We may need to see the reserve bank cut interest rates soon.’

He also said policymakers must be sympathetic to the needs of big business: ‘If we hammer big businesses they’re not going to invest and this will push confidence even lower.’

On Australia’s housing downturn, he said the worst case scenario would be a 20 per cent plunge in prices this year, which would pose a large threat to the economy.

But he said a drop of 10 to 15 per cent is more likely and this would be ‘manageable’.

‘To see something considerably worse than that would require a large increase in unemployment to precipitate defaults and forced selling as we saw in the US before the global financial crisis.

He said the main factors driving house price falls were a tightening of credit conditions, over-valuation, high debt levels, and a surge in supply especially in Sydney and Melbourne. 

On Australia's housing downturn, Mr Oliver said the worst case scenario would be a 20 per cent plunge in prices this year, which would pose a large threat to the economy

On Australia’s housing downturn, Mr Oliver said the worst case scenario would be a 20 per cent plunge in prices this year, which would pose a large threat to the economy

He concluded: ‘Overall it’s not likely that Australia will suffer a recession but the risks are there and we should not be complacent.’ 

The IMF’s downgrades reflected signs of weakness in Europe, with its export powerhouse Germany hurt by new fuel emission standards for cars and with Italy under market pressure due to Rome’s recent budget standoff with the European Union.

Growth in the euro zone is set to moderate from 1.8 percent in 2018 to 1.6 percent in 2019, 0.3 percentage point lower than projected three months ago, the IMF said.

The IMF also cut its 2019 growth forecast for developing countries to 4.5 percent, down 0.2 percentage point from the previous projection and a slowdown from 4.7 percent in 2018.

‘Emerging market and developing economies have been tested by difficult external conditions over the past few months amid trade tensions, rising U.S. interest rates, dollar appreciation, capital outflows, and volatile oil prices,’ the IMF said.

 

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