Trouble Down-Under: Why Australia Could be Heading for a Recession

The last few years of this decade have seen some surprises in terms of political victories, and 2019 is no exception. Australian Prime Minister Scott Morrison’s victory in Saturday’s elections prove that yet again, conservatives have defied the polls and won a shock majority. Exit polls had predicted a Labor victory for the first time in six years and the party’s leader, Bill Shorten, resigned in the wake of his party’s defeat. As the Liberal-National Coalition has won, their honeymoon could be short-lived. There is trouble brewing Down-Under, and it seems likely Australia will not be immune to the effects of a recession, like it was in 2008.

Australia has not had a recession in 30 years. Australian banks were well-capitalised and survived the 2008 Recession well. Whilst the rest of Europe and the US faced high budget deficits that year, Australia was debt-free, its economy was growing strongly and running budget surpluses. They also negotiated favourable trade deals prior to the crash, like the US-Australian trade deal.
Stephen King of Essa credited the four-pillars banking policy of the Hawke-Keating government in 1990 for saving Australia’s banks prior to 2007-08. This policy prevents mergers between the country’s four largest banks- Commonwealth Bank, Westpac, ANZ and NAB. An IMF paper argues that Australia and Canada’s banking systems coped with the 2008 Recession because there was mid-competition between banks in those nations.

Australia also had more effective regulation than European nations and the US. Regulation matters and it is important for governments to ensure there are common sense rules that do not hinder competition whilst protecting consumers from exploitation. Even Adam Smith believed regulation was necessary, and Australia served as a good example of how to regulate an economy efficiently. Belratti and Stulz, in a paper for the European Corporate Governance Institute, found that banks with the highest returns in 2006 had the worst returns in 2008. They concluded restrictions on banking activity; strict oversight of bank funding; and regulatory independence, all raised the likelihood that a bank would survive in 2008. Australia had implemented sensible regulations during the 2000s and the government ensured there was funding in place to prevent a run on smaller banks.

However, the Australian miracle of economic prudence may be reaching a conclusion. As King wrote, “it is worth remembering these factors, because the 2008 Great Financial Crisis was not the first crisis to hit the Australian financial system, and it will not be the last.” Nick Hubble of Southbank Investment Daily has discovered how lending standards have become incredibly lax. For example, he said banks have been fabricating mortgage documents. Bank employees are over-selling mortgages to people who can’t afford them.

In February, Royal Commissioner Kenneth Hayne urged the Government to implement rules to prevent the big four banks from abusing their power. This includes outlawing customer fees for services they never received, preventing superannuation of products not in the customer’s best interest, and a compensation scheme for consumers to allow them to have their cases heard in court. But weeks before the recent elections, the Government retreated from the Commission’s recommendation to clamp down on what ABC call “liar loans” – based on inaccurate information that they have been massaged to help the borrower receive a bigger loan than they are eligible for. It was these types of practices that caused the 2008 Recession.

Australia must return to the common-sense regulation that made it the envy of the world in the 2000s. As Kit Winder of Southbank Investment Daily wrote, house prices have recently fallen by 10 per cent, approaching a 30-year record. The Liberal-National Coalition has had an unexpected win, but if they want another one, they need to clamp down on bad banking practices that could lead to the equivalent of the 2008 Recession for them.