I was wrong about recession: Phil Ruthven

Forecaster and IBISWorld chief Phil Ruthven has admitted Australia can no longer avoid a recession, but says it will be very minor and shallow. And he also says he is not sorry for calling it wrong.

“I thought we could avoid it,” he told SmartCompany this morning.

“But it has gone a little deeper than I thought. I am not going to apologise for getting it wrong. We are talking decimal points, and economists who get things wrong by 1% to 2% get an Order of Australia.”

In November last year, Ruthven told SmartCompany readers that avoiding a recession for Australia in 2009-10 should not be that difficult.

“The Treasury in Canberra and our Reserve Bank are both skilled to act swiftly, and yet again avoid a recession,” he said at the time.

“The Rudd Government has now acted quickly to bolster both capital and consumption expenditure in the middle of October (2008) so another potential recession would not be due until 2018 at the earliest.

“We have three weaknesses in 2008 – a chronic lack of savings that led yet again to massive off-shore borrowings in fiscal 2007 (over $52 billion), overpriced housing (by just over 30%), and some over-leveraged property trusts. These weaknesses, however, are not enough to panic about. So talk of a recession let alone a depression is premature, if not almost ridiculous in the case of a depression.”

So what has changed? Ruthven says two things are different.

First, he didn’t estimate how deep a fall in world trade would be. “About 20% of our GDP depends on exports. So the deep fall in trade has knocked a bigger hole in exports, which has affected the economy,” he says.

Second, Australians have been spooked. “They are scared by world events, and they are not convinced by the Federal Government to go out and spend, so they are not spending.”

He says the Federal Government needs to do more to talk up confidence.

“The families of Australia have never had so much cash in their life.” He says the fall in interest rates from 9.25% to 5.25% means there is now a saving of 4% on the average mortgage of $240,000 for five million families in Australia.

“That means they have $9600 in after-tax money that they didn’t have last year. Petrol prices have also fallen, so that’s another $1000 they have, which means they have $10,500 in disposable cash this year. We have enough cash for a booming economy.”

 And he says the Australian economy is the most bulletproof.

“We went into this with no debt. Our only problem is overpriced housing. That fell by 3.3% last year and will fall this year. But we have a desperate shortage of housing because of the high immigration rates of the last five years. We had in excess of 180,000 immigrants last year and only built 75,000 houses a year. That extreme shortage means there will not be a huge drop in housing prices, but over priced housing will settle back to normal.”

He says fear is preventing people from spending, and therefore the extra stimulus packages from the Government won’t help. “That is like giving a drunk another drink. It won’t achieve much.”

Ruthven is addressing a business group this morning in Port Douglas. “I spoke to them a year ago, and I will be telling them that instead of growing as I predicted at 1%, there will be no growth and technically a recession. While unemployment will rise, this will be nowhere near as severe as other recessions.”

He says that although he now expects this quarter to have negative growth, thereby placing Australia technically in recession, he does not expect a calendar year of negative growth. “Australia will sail through this and we will have quite positive growth for 2010 of 2%.

“This will be the mildest recession we have ever experienced, but it is very scary because it is a global problem,” he says. “And you have to remember the last recession we had was over 18 years ago. Most people in business have no memory of it, and so they are much more easily spooked.”

Ruthven says there are very positive signs. “We are seeing at the G20 that they are not going to support protectionism, which is good for our exports. Obama is starting to support that position.”

And countries are moving to make sure the banks have liquidity to lend. “That is going to take $10 trillion. Now America has put in $US2.5 trillion and Europe another $2.5 so when we get another $5 trillion into the system, business will begin to recover and take our exports. The dollar has fallen back to 65 cents from 95 cents so that also makes us very competitive.”

Ruthven says the toxic assets are also worth more than they are on paper and they will soon start being bought up. “In 1991 they were called junk bonds, and we will see a repeat of what happened back then. The bargain hunters will move in and the toxic assets are worth more than they are on paper.”

He also says the US housing market will recover quickly when it recovers. “In Michigan a house is selling for $3000 that was worth $84,000 a year ago. About $50,000 of that is land. So if you are paying $3000 of that, you have got the bargain of a lifetime.”

He also says shares are down 50% and they should be only down 20%. “You will never get another chance in your lifetime to buy shares or toxic assets at the price you can now,” he says. “So first the individuals will move in and then the vultures, and then it will be on for young and old, and that should happen the second half of this year.”

Yesterday Alan Kohler wrote a piece entitled “Don’t be fooled – this recession is just getting started and it will be ugly“. Whose view do you agree with? Is Ruthven right or Kohler?

Have your say below on whether it is fear that is holding us back.

See also 10 recession-hit sectors that offer opportunity