Australian Recession coming?

May 4, 2012

Australian Economy

Two things happened yesterday that suggest to me that the Australian economy could be headed for recession. The first was the collapse of the First Fleet trucking company and the second was the release of the Australian Industry Group’s Performance of Service Index (PSI) which slumped 7.4 points. Houses and Holes covered it well in his piece here yesterday which he title “Something just snapped in the economy”.

But I want to focus on the 1st Fleet collapse in this post and what it means to me.

When I was a young fella my dad was a concreter but as he got a bit older his body packed up a bit and dad had to find a different path. He tried a few things and ended up a few years later buying 3 old Bedford Trucks, cannibalising them into two working trucks and set up his transport company out of the back of my Grandparents house in Auburn.

Mum and Dad did fairly well building up that business and had a decent transport company running by the late 1980’s. When I started working in financial markets in 1988 and particularly when I started trading in 1990 I noticed that I was making money from my conversations with dad. His business was tapped into the arteries and the plumbing of the economy, at least in Sydney, and I made money trading as the recession we had back then hit and bit and then I made more money as it lifted I was able to short interest rates and make money on the way out of recession.

It was my shorthand way of knowing what was really going on the economy.

I remember when 1st Fleet started and the trucks started popping up around Sydney and one of the drivers lived in our street. It’s a company that’s been going for at least 20 years and seems to have had a good business.

So, when I see that it has collapsed it reminds me of all the collapses that happened back 20 years or so ago. It reminds me of the trouble mum and dad had collecting their debts as their clients either stopped paying, went belly up or just extended payment times materially and I am genuinely worried about the health of the economy.

Writing in the Australian today Andrew Fraser puts it perfectly when he says,

“THE arteries of Australia’s economy are in trouble and the collapse yesterday of 1st Fleet could be a sign of things to come.”

He then echoes the very stat I used to hound dad about his business and what he was hearing in the industry to influence my trading decisions – payment times.

“…Chairman of the nation’s peak trucking body, the Australian Trucking Association, David Simon said larger companies were increasingly demanding longer periods until they began paying their road transporters and this was hitting truckers hard.

Mr Simon said big corporates were demanding terms of 45 to 60 days from end of month before payment for jobs.”

When you payment times start to slip you run into cash flow problems because you have to pay your drivers and subbies weekly but the clients you just worked for aren’t going to pay you for a couple of months, at least, if at all.

Now obviously there are other pressures in the trucking industry and there are also individual factors for individual companies. But as someone who has been consistently worried about the economic outlook in Australia due to household de-leverage this turn of events in the PSI and 1st Fleets collapse reminds me of the lead in to the recession we had to have 22 years ago.

So in the midst of a mining boom the idea that Australia could enter recession is a very left field call and the Reserve Bank is going to everything in its power to ensure this doesn’t happen. But with the Government tightening their belt along with the Household sector the risks are rising that for the first time in a generation Australia heads into recession.That means that rates will probably still head substantially lower and hopefully take the Australian Dollar with them.

Gregory McKenna

Please remember these are not recommendations for you to trade these are my views and I have my risk management tools and risk parameters that you do not have access to. Thus, this blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

If however you do need advice on Investments, Economics, Funding and Liquidity, Interest Rates and Forex and Derivative markets we are happy to help.

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12 Comments on “Australian Recession coming?”

  1. The Blissful Ignoramus Says:

    Spot on Greg. These are the kind of basic insights that seem to escape those in the ivory towers. Nearly everyone in every kind of (non-mining) business that I have spoken to has, for months now, expressed a similarly stoic but downcast view of the economy, how their own business is/was travelling, and the future ahead. I often wonder whether or not we would have a better Parliament, and better economic management viz RBA et al, if we simply held a lottery of taxpayers, and drew names out of a hat to fill the positions.


    • Gregory McKenna Says:

      Yeah i got a great insight into the real economy last February in 2011 when I was addressing the Raymond Terrace Chamber of Commerce and I was talking about my economic outlook, which was along the llines of what has occurred, and i was asked where the boom they had been told about and were being told about was – very interesting the disconect between the aggregate and the particulalr…

      As for the lottery I think it would work well at first until the power corrupted them all (in the self interest sense not doing anything fraudulaent – if you know what I mean) 5 minutes later and they formed off into tribes and groups


  2. tristencosgrove Says:

    I also think a recession is probable for Australia possibly within the next twelve months. I mentioned some reasons on 10th April 2012.

    PS. I enjoyed your “Squaring the Circle” Post


  3. Senexx Says:

    Without the PSI contributing to the direction of your thoughts (not that I particularly disagree) I would have argued that your experience with your father led you to have an “anchoring bias” when you saw a trucking collapse again.


    • Gregory McKenna Says:

      Absolutely right if it was an isolated occurrence but the ducks are lining up in terms a weaker path ahead for growth – this is a question and a warning based on my experiences.

      I genuinely hope I am wrong


  4. AB Says:

    This has been cross posted at APF: I’m sure they got permission to do so?


  5. Michael O Says:

    I run my own business and undercutting of prices is well and truly here.


  6. Thomas Says:

    I think Australian Recession coming? | Lighthouse Securities is a nice article and you do a solid job of posting in depth. TJ –


  7. Andrew Says:

    How about the housing sector’s alleged bubble? Has the demand and exorbitant prices in some State as a result of the mining boom going to continue on? Or is it going to finally snap, crackle and pop?



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