Q&A: the big picture
MLC Investment Strategist Brian Parker answers the big picture economic questions we didn’t manage to get to in our December webcast. View the online discussion and watch this space for more Q&A.
Have you any idea when the bounce may come?
The short answer is that no-one knows. What we can say is that share market recoveries tend to happen before economic recoveries. In other words, waiting for better economic news as a sign of better times for the share market could mean you miss the bounce when it happens.
What will recover quicker the Australian share market or the international share market?
In this kind of environment, the local market is likely to take its lead from offshore movements. That’s not to say we cannot recover without a lead from offshore, it’s just that you would not want to bank on it.
How do we know when Australia enters a recession?
A recession is popularly defined as two consecutive quarters of falling Gross Domestic Product or GDP. However in my opinion, that definition is too simplistic. A better definition of a recession is a sustained decline in output and employment across a majority of industries in the economy. To make that call, we need to look at a range of indicators, including employment, retail sales and manufacturing output.
The Melbourne Institute of Applied Economic and Social Research (within the University of Melbourne) identify the start and end of Australia’s recessions using a broad range of indicators, as detailed on their website.
What impetus or catalyst do you foresee that will start the move out of recession?
If an Australian recession occurs this year, which is a real possibility, then the best ways to summarise the catalysts for recovery would be in terms of policy and confidence. Over time, expansionary policy settings (lower interest rates, higher government spending and/or lower taxes) do tend to work. They don’t work immediately, but they do work. Confidence is another key ingredient. While lower levels of confidence do not necessarily signal a recession, and higher confidence does not necessarily mean a recovery, if consumers and businesses become confident that the future will be brighter, this can and does have an impact on their spending decisions.
In the case of a US recession, the answer is largely the same, except for one important factor. Lower interest rates only work effectively if banks and other financial institutions are willing and able to extend credit. For now, that is not happening in the US. But eventually it will.
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