A recession in 2020? It’s easy to imagine, if you consider…
- Australia has a worsening unemployment rate and pathetic fiscal response
- If the nation turns to the RBA for further monetary stimulus it will be forced into the untried approach of quantitative easing
- Recession indicators — “yield curve inversions” went off around the world simultaneously in 2019
- The gap between anaemic economic growth rates and sky-high asset values is opening up into a chasm. When global growth is so dismal and spotty, how can we be seeing such high valuations in capital city housing markets, in US markets for pre-IPO unicorns, in the NASDAQ, and in European government bonds? All of which are bid to within an inch of their life!
Once you go looking for reasons to worry, they’re easy to find. I’ve written plenty over the last year about risks, and about the prospects of a 2020 recession.
But we must beware of confirmation bias, the human cognitive quirk that leads us ever deeper into a web of beliefs we already hold. It’s more enjoyable to read about bad news when we’re worried than to have those beliefs challenged.
So, what are the counter-arguments to perpetual doom and gloom?
Growth in a time of risk
The global economic landscape is never smooth and featureless. There are always risks. Australia’s average growth of 3.3% a year over the last 30 years has happened during periods where the reasons to worry were serious and very numerous. Wars, crashes, tsunamis, etc. A terrifying list of risks and healthy growth turn out to be long-time companions.
There is a generation of people — about my age — whose beliefs about the nature of global markets were forged in the fire of 2008/09. We — and I include myself here — tend to see disaster in every market blip. But market catastrophes are, in truth, the exception not the rule. It is important not to overdose on pessimism.
In the spirit of open-mindedness, let’s scrounge around and see if we can find some reasons not to panic.
The clearing of risks
In 2019, risks piled so high they blacked the sun. A trade war, Brexit and the UK election. Political strife in Italy. Major unrest in Hong Kong. Each of these is a potential flashpoint, a small fire that could turn into a major inferno.
But, of course, risks don’t only worsen; they can also fade away, creating a clear path for growth. As 2020 dawns, the US-China trade war seems to be approaching a detente and the uncertainty around Brexit has dramatically reduced following the election of the Conservative Party in the UK.
That might give firms in the US, Asia and Europe confidence to go ahead with investment decisions. If you were unsure whether to build a new HQ in Liverpool or Rotterdam, it’s now clear you should choose Rotterdam. If you wondered whether to build a factory in the Pearl river Delta (China) or the Mekong Delta (Vietnam), you can now choose the former with more confidence.
When uncertainty clears up and investments go ahead, growth should follow. Those factories need builders and materials, and then they fill with workers. All that activity flows onward and might eventually cause Australians to encounter that long-forgotten thing: a decent pay rise.
Looking closer to home
Domestically, not everything is terrible. Wages growth and underemployment are somewhat grim, yes, but paradoxically, it is in the labour market that we also find a shining beacon of hope.
If you have to choose one factor that is outperforming expectations, it’s employment growth. A lot of Aussies are in jobs and a record share are in the workforce, as the next graph shows.
Australia’s strong labour force participation is important to remember when we compare our 5.3% unemployment rate to America’s 3.5% — their labour force participation plunged from 67% to 63% in the global financial crisis and never recovered. The US unemployment rate looks low but it doesn’t consider the high proportion of Americans not even looking for work.
Work experience builds human capital. It is far better for future growth prospects to have people in work — even if some of it is unreliable part-time work — than to have people out of work. Our labour force situation sets us up nicely for a potentially fecund period ahead.
We know we are dependent on China’s trajectory, and we know its growth rate has fallen to a record low of 6.2%. But that is not so bad as it seems.
China’s GDP is 10 times what it was in 2000. One per cent growth in Chinese GDP today adds as much activity to the world economy as 10% growth did back then. Six per cent growth today means China is still adding an Australia worth of economic heft (over US$1 trillion) every two years.
Each year, China contributes truly mind-boggling quantities of demand to the globe. Whether you work in education or tourism, wine or milk, ore or pearls, the growth of China is making your opportunities explode.
How secure is China’s growth? That has been the big question. Nothing is certain, but China has dealt with a substantial risk that seemed to be brewing in its financial markets. Social financing — a kind of unregulated lending with a high propensity to go bad — was through the roof, placing the country at risk of a financial crisis. As the next graph shows, China decided reducing that risk should be a priority for its centrally controlled economy and promptly reeled it in, reducing the risks.
With China continuing to grow steadily, the domestic economy putting a lot of people in jobs, and the global economic landscape suddenly brightening, 2020 is a year that might — just might — not have the recession so many of us are worried about.