Australia following Britain's GFC playbook

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Chris Watling, CEO and Chief Market Strategist at Longview Economics, recently sounded the recession alarm on the Australian economy. We had the chance to sit down with him to explore his view, hear where he’s seen a very similar set up before, and to learn just how bearish he really is.

Chris emphasised the negative feedback loop that can gather pace between banks and borrowers, noting that: “then you get into the pro-cyclicality of the downturn. This is the bit I think people never fully quite get the full grip on until it's actually playing out and it seems it takes a load of chapters to get there”. Both the playbook he draws an anology with and the degree of bearishness he expresses on Australia are quite sobering. Watch the short interview, or read the transcript below. 



What stands out is a playbook that's very similar to the playbook we saw in the UK in the run-up to '07 - '09.

That playbook is well described and well known down here as a very strong housing market in the run-up to the last 12 months, a household that stopped saving with a savings ratio that's super low, and a lot of debt has been built into the system and that's generated high house prices.

I think then you get into the pro-cyclicality of the downturn. This is the bit I think people never fully quite get the full grip on until it's actually playing out and it seems it takes a load of chapters to get there. I thought after the recent housing finance data, I noticed there were some more domestic houses that downgraded their outlook for house prices. I

t's a slow sort of process, but actually the reality is that banks are pro-cyclical, they're pro-cyclical on the upside and on the downside.

Of course, what happens is once house prices start softening, a few quarters after household savings ratio start going up, households start panicking, confidence comes off, and that's what generates the recession really. I think that's the playbook that we'll probably see down in Australia that'll get the recession going.

Interestingly, if you look at all the parallels of developed market housing deflations, really once you get a 10% off the peak of housing prices, you're looking at a household savings ratio that's going to go up two, four, five, six, seven, eight, nine percentage points. Those are big moves. They create recessions. 

It's a very difficult time in markets and I would actually say that I speak to a lot of people in various financial centres around the world and I'd say there is a lot of 50-50 out there. I can see a really strong argument for being reasonably optimistic about the global economy on a two-year view, but I can also see some very, very serious risks. If you think about it, we've tightened money a lot. That doesn't tend to happen except at the end of cycles. I actually want to hedge my bets a little bit. I have views and we express views obviously, but in terms of a one to 10, I would be a complete hedge in the middle because I can see a good two years but I can also see that tightening in there. 

Actually, it's like someone said the other day. This probably works well in Australia. When you fish with dynamite, it takes a while for the big fish to come to the surface and that's really what tightening is. It's a very blunt tool. It's a bit like fishing with dynamite and sometimes things come to the surface, you don't realise it for a while. I guess I'm saying I'm a five, which is a complete fudge. 

In Australia, I'd be much closer to a 10 (out of 10) bearish because I think there's a very real risk that things really have rolled here. And you'll see the pressure come to bear over the next 12 - 18 months.

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