While the global economy is a while away from a recession the dominos are beginning to fall and may eventually all topple over according to JPMorgan.
Global market strategist at JPMorgan Kerry Craig said that his market case was not for a recession but there were elements to look out for.
“The dominos have started to fall but we are nowhere near a recession which I think is the important thing. There is moderately more risk around a recession but what keeps us confident is the policy response,” he said.
Mr Craig said the chips that were still standing were employment and consumption and if those two fell that’s when it was time to worry.
“The thing that really props up the economy and keeps things ticking over is consumption and if consumption starts to flag or fall that’s when we really start to worry about a recession,” he said.
However, people had to be careful not to look at every market change as a cause for concern because that would have negative implications too.
“The expansion has been going for more than a decade and it’s like a volcano that doesn’t erupt, every time you get a new rumble around a weakness after such a long period of time we worry that it’s going to be the big one and that’s what is going to create that recession,” said Mr Craig.
The consumer was the pillar still holding up the economy as consumer sentiment was strong and people were still spending, and when they count for 60 per cent of economic growth it accounts for a lot of sway said Mr Craig.
“The government and the RBA want us to keep spending money. The reason why the RBA cuts rates to keep money cheap is so we go out and spend more of it to create economic activity and to generate inflation,” he said.
The RBA probably had one more rate cut in them said Mr Craig, but they weren’t going to rush into it.
“They want to see what happens with the tax changes and how that affects consumption and the housing market and how prices start to change and assess what happens internationally in this whole trade war with US and China," he said.
They won’t want to spend all this political capital right now and cut rates again but if they need to, they will.”
The reason they would wait is because the Australian economy was not in a bad shape as the RBA had kept making sure to reiterate.
RBA Governor Philip Lowe has said as much with each rate cut, even in his last decision he said: “The central scenario for the Australian economy remains reasonable, with growth around trend expected. The main domestic uncertainty continues to be the outlook for consumption, although a pick-up in growth in household disposable income is expected to support spending.”
Mr Craig said the RBA was quite positive about the economy and really the only place they had changed their thinking was around spare capacity in the economy.
“Look at employment conditions in the economy, if they continue to soften then the RBA will cut rates and it’s that simple,” he said.
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