The R Word: The Write Direction by John Blackbourn

THE one thing that no one wants to talk about at present is the ‘R’ word.

Recession however is a distinct possibility for the Australian economy.

All the available technical charts with fundamental research on economical facts say almost unanimously that a recession is now a real possibility.

It panics the politicians and our economic managers, who when asked will always reply that they don’t think it is a possibility.

What they really mean is that they hope the present downturn won’t come to that and they just might be right expressing that view.

The difficulty with recessions is that they occur after two consecutive quarters of economic growth, with minus numbers in front of them rather than positive ones.

Therefore, it happens whilst we are waiting for the numbers to be calculated, and we all are now operating in that R environment.

The immediate effect of a recession being declared is a psychological one where people and businesses immediately tighten their expenditure, even though the past six months of the slowdown should have been pointing to that necessity.

So where are we at present?

It looks like the economy has developed into two distinct parts.

On one side we have those who are struggling or in strife with their financial commitments.

This includes the young just trying to get started in life and those who now can’t keep up with their housing loans or the car repayments as their cash flow just doesn’t allow them to live the way they thought they could.

The other group is usually represented by older people who have paid off their previous commitments and those with businesses who can adjust their expenditure; often by letting staff go in order to reduce input costs.

So, what is the picture we are presently looking at?

Unemployment is at the lowest level I can remember and bolstered by the highest number of job vacancies.
This means that work is available for those who need it.

Recent reports on the housing situation say that 25 percent of the homes being purchased are cash transactions, probably by long-time homeowners either upgrading or downsizing.

A similar number of homeowners are comfortably in front of their loan requirements and in no immediate danger of getting into difficulty.
What other factors should give us a clue about the R words’ possibility?

Rising unemployment is an important clue, but that doesn’t appear to be happening.

In fact, the opposite seems to be the case.

Rising interest rates can also produce the possibility of recession.

The Reserve Bank is saying it is mindful of that issue but needs to keep increasing rates as their only lever available to reduce the high rate of inflation.

It is a case of being tough now in order to prevent a far more serious result if they don’t nip inflation in the bud as soon as possible.

We should only expect interest rates to keep climbing, maybe not every month, but certainly the direction is upwards until the population decides to dramatically cut their demand for goods and services on a continuing basis. This would quickly reduce the scourge of inflation and allow us all to get back to happier times.

Much of our population has never experienced a severe downturn in their lifetime and views their economic existence with greater optimism than is prudent.

The 1930s depression or the 1902 drought, when males needed to carry their swags and seek food by working odd jobs when available, are times far from the thoughts of the average Aussie today.

Our bankers and government economic managers live with that reality. Especially if things get too far out of hand, then the outlook is grim. Seriously, it is a time to reign in optimism and tighten our spending.

The old saying about a stitch in time has some relevance so we can return to normal conditions at the earliest opportunity.

The boat can sink if it is rocked by too many people and our behaviour on the good ship that is Australia will determine when we come out of these rough waters and sail towards a happier, more secure financial future.


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