Are We Heading Into a Recession?

SYDNEY -- Economist Ross Garnaut has warned Australians to prepare for lower living standards as the resources boom bites the dust.

Meanwhile, BHP has warned that Australia could lose 25% of its exports with China's growth slowing, commodities prices declining, and costs rising -- all of which are leading some mining projects to become uneconomic. Some Chinese officials have already said that China is reluctant to introduce another stimulus package to lift the country's slowing growth.

Because governments haven't saved enough of the resources boom income in budget surpluses, it's likely Australia could be forced to run up government debt in order to keep economic growth alive. That could see much lower interest rates, a lower Australian dollar, and the loss of our AAA credit rating. Standard & Poor's has said that our sovereign rating assumed that budget cuts continue. That won't happen if Australia is forced to run deficits for a number of years.

Australia could be heading into a recession (defined as two consecutive quarters of negative growth), which could feature higher unemployment, lower house prices, and weak credit growth -- all bad signs for our banks, including the big four: Australia and New Zealand Banking GroupCommonwealth Bank of Australia, National Australia Bank, and Westpac Banking Corporation.

We could see miners lay off thousands of workers. It has already started, with Fortescue Metals Group (ASX: FMG.AX) losing 1,000 employees and coal mines shutting down and shrinking operations, causing about 2,000 workers to lose their jobs.

Because we've had 21 years of uninterrupted growth -- even during the global financial crisis, Australia grew -- many of us may be mentally unprepared for how bad it could get. But it's easy enough to be prepared for what may come, and if it doesn't come, then you'll be ready for the next time.

Once you accept that there will be periods of weakness and recession ahead and that we probably can't predict what and why, it can actually be quite a calming realization. You stop trying -- in vain -- to know all the answers. Instead, control the controllables, focus on what Steven Covey calls your "circle of influence," and extend your investing horizon so that what seem like major economic dislocations become small bumps in the long-term trend.

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Motley Fool writer/analyst Mike King owns shares in BHP. The Motley Fool has a disclosure policy.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, while it's still available. This article contains general investment advice only (under AFSL 400691). Authorized by Bruce Jackson.


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