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Australia's economy is a huge mess, but it's not doomed for a recession

Although Australia's mining boom has faded, there is cause for economic optimism according to investors.

Australia 2013 6 18Enlarge
This file picture taken on March 4, 2010 shows remote-controlled stackers and reclaimers moving iron ore to rail cars at Rio Tinto's Port Dampier operations in Western Australia's Pilbara region. (AMY COOPES/AFP/Getty Images)

Australia faces a a “significant but low” 15-20 percent risk of recession as the mining investment boom fades, according to a research note by AMP Capital’s chief economist Shane Oliver today.

Here’s why Oliver thinks there is a risk of recession:

“Essentially, it’s argued that Australia has been propped up by a huge mining boom which boosted national income and in turn underwrote a boom in residential property prices.

With the mining boom fading, it’s argued the economy will collapse and unemployment will surge triggering a sharp increase in mortgage delinquencies and a collapse in house prices, ultimately leading to huge problems for the banks.”

And here’s why he thinks a recession may be avoided:

“There is still plenty of scope for lower interest rates and a lower $A to boost the economy … Just as high interest rates and a high $A put many non-mining sectors of the economy into hibernation over the last few years to make way for the mining boom, this will now go in reverse allowing the pressure to come off these sectors and the economy to return to more balanced growth in 2014, led by the laggards of the last few years such as housing, retailing and domestic tourism.”

Oliver expects the Aussie dollar to fall to about $US0.80 “over the next few years”, as the RBA attempts to offset relatively high prices and costs and boost manufacturing, domestic tourism, agriculture and mining industries.

Investors should favour Australian bonds over global bonds and expect unhedged global shares to outperform Australian shares, he says. Bank term deposit rates are expected to fall further to below 4%.

Treasurer Wayne Swan has cried foul over media reporting of Australia’s recession risk, arguing in a lengthy article last week that trashing confidence in the economy was reckless and not in Australia’s national interest.

Goldman Sachs last week put Australia’s risk of recession at 20% but said a recession would likely be avoided with better global growth, domestic policy stimulus and a lower Australian dollar.

And Bank of America Merrill Lynch economist Saul Eslake this week has a research note putting Australia’s risk of recession at about 25%, with real GDP growth slowing from about 2.75% this year and next to 1% in 2015 and -0.1% in 2016, and unemployment reaching 7.5% in mid-2016.

On the flip side, Eslake says there’s a 75% chance of real GDP growth reaching just under 2% in 2015 and 1.5% in 2016, with unemployment peaking at 6.75% in early 2016.

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