Australia has been benefiting from an economic boom for so long that we seem to have forgotten the low plateaus of economic downturn and recession. But does economic downturn necessarily mean recession?
The generally accepted definition of recession is a period of negative growth over three successive quarters in an economy. Often tied to gross domestic product or a decline in stock prices, negative growth is also linked to business activity and low employment.
‘Negative growth’ sounds like an oxymoron, but it describes the continual decline of an economy. It seems Australia is safe from recession—whether we ‘have to have’ one or not—because despite rising interest rates and inflation, employment rates are still buoyant and we’re steadily posting positive growth. Economic downturn may mean deceleration, but it doesn’t mean going backwards.
Global Recession
“The only country that’s probably on the brink of a recession is the US. There might be a few smaller ones but they probably won’t affect our markets significantly,” remarks Dr Werner Soontiens, associate professor of international business at Curtin University. “The US seems to have recovered from the subprime housing crisis but that has brought it to a standstill.”
But the subprime mortgage crash, where foreclosed loans to risky borrowers left many lending institutions in the lurch, isn’t the only thing happening in the US. Their reliance on oil has meant that the current oil shortage could trigger something more than a dip.
“I would strongly suspect—and there’s always a condition to this—that even if oil prices were to stabilise, the American economy will remain on the brink of recession for at least another 12 months. If oil prices were to increase, there’s a very significant risk that the American economy will go into deep recession,” says Soontiens. “It’s very much linked to current oil prices, and that is assuming there won’t be another destabilising factor that occurs that no one has seen on the horizon. The loan crisis came as a surprise to most people.”
Even if global recession is unlikely, the decline of a market as big as the US is sure to reverberate around the world. Any country that counts the US as an export market will need to brace themselves for lower sales, says Soontiens. “The follow on effect of negative growth will predominantly affect their consumer goods, primarily because the US is renowned for being a consumer economy. Consequently, final consumer products being exported or being consumed in the US are likely to experience reduced demand.”
If an economy like China, which earns much of its export revenue from selling finished consumer products, takes a hit from reduced sales in the US, it could further affect countries doing business with them; in others words, almost everyone.
“The reality is that a lot of the component manufacturing that takes place in various markets for final products will have a knock-on effect. Something might be assembled in Spain, but there might be components coming from Taiwan and other components coming from Madagascar,” explains Soontiens.
And of course the length of a potential recession would have an effect. “If you assume that the US goes into recession and the recession is longer than 18 months, then that would lead to a contraction of local markets as well because of the collapse or reduction in exports. Initially it’ll only be exports, but if that is long enough then the contraction will spread to other markets.”
Diversify Exports to Avoid Recession
At $48 billion, the amount of bilateral trade between Australia and the US ranks third after China ($58 billion) and Japan ($55 billion), but most of the money comes from us—we import about $32 billion worth of US products and services. Fortunately, our diverse customers will save us from major impacts, and this is what Soontiens recommends we should do to stave off negative effects.
“A US recession will force Australian exporters to diversify their exports, if they’re specialised and well set up in a particular industry or particular segment. So it’s about attempting to get into markets that are not as prone to these conditions, looking into east Asian markets where the consumer patterns are starting to change quite significantly—but that’s a long term perspective,” he says. “It’s probably a matter of shifting away from a market where recession takes place, to a market that has a potential longer term growth pattern like India and China, Malaysia and Indonesia, Brazil and Argentina.”
Soontiens concedes that emerging markets have risk, but suggests that exporters can mitigate some of them by first looking into joint ventures or partnerships. “Not completely being risk-averse but taking some well-calculated risks. Once again, if you understand the market well enough then those perceived risks might not be as risky as you think they are. You might well be able to reduce those risks, or manage them at least, and not be exposed to an economy that seems to be out of control,” he says.
Recession will also treat different sectors differently, because of the traditional customers that support various industries. “There will be a significant difference between the commodities market and the services sector. The commodities market is basically an input into ultimate consumer products, but it has the benefit of having a very strong drive in the non-US, non-First World environment,” notes Soontiens. “The services industry would be much more prone to the recession than the commodities market.”
Segmenting a sector may also help exporters understand whether a recession would affect their business. Like firewalls, segmentation means that just because some aspects of a sector become affected, the whole sector won’t necessarily follow.
“What we’ve seen over the past few years with certain crises in certain markets is probably a proliferation of segmentation within industries,” says Soontiens. “Although you might have the finance industry, the banking and insurance industry are probably starting to function on different dynamics. If you were in insurance, you would have been hedged somewhat from the subprime crisis. If you were in banking, you wouldn’t. So I think understanding the segment of the market in which you’re operating is crucial, as well as having a good grasp of understanding of what the trends and tendencies are in those markets.”
Foreign Investment
A recession is not forever, and the resilience of the US will mean it will remain a significant market for some time, even if its reign as a superpower may come to an end. Soontiens suggests that now may well be the time to invest while our dollar is strong.
“Foreign investment in an economy slowing down would have the underlying value of buying into that economy at a more reasonable price. If the growth picks up then obviously that would reflect in your investment,” he says. “The reality is that often the risk and the financing of foreign direct investment tends to be so significant that most small to medium enterprises are still extremely hesitant to move into markets, particularly on their own. It’s a bit like buying a house when the house market is on the downturn.”
Separating ‘recession’ from ‘collapse’ is important, Soontiens reminds us. “The US economy is not going to collapse. It might slow down for a few years but it’ll be healthy again.”
Which is a way to say that just because recession may occur, doesn’t mean it isn’t an opportunity.
Definitions
Recession: a widespread decline in the GDP [gross domestic product] and employment and trade lasting from six months to a year.
Depression: a long-term economic state characterised by unemployment and low prices and low levels of trade and investment.
Bear market: a market characterised by falling prices for securities.
Credit crunch: a state in which there is a short supply of cash to lend to businesses and consumers and interest rates are high.
Inflation: a general and progressive increase in price.
Interest: a fixed charge for borrowing money; usually a percentage of the amount borrowed.
—Source: Princeton University (wordnet.princeton.edu)
