Australia: How deep the recession?

 Here, I said that Australia might reach a lower turning point in its economic cycle later this year, but that it wasn't clear just how deep the recession might get.

The chart below compares the change in the "cash rate" (The Reserve Bank's discount rate) with my coinciding index.  The change in the cash rate has been plotted inverted, because when it rises economic activity slows, and it has been plotted with a lag, because it takes time to take effect.  This gives us an implicit forecast of what economic activity will do over the next 10 or so months.

This indicator points towards a recession lasting to the end of this year, deeper than any recession in the last 30 years.

The chart below shows the year-on-year change in real (= inflation-adjusted) money supply compared with my coinciding index.  Again, it’s plotted with a lag, because changes in money supply take months to have an effect.  It hasn't yet conclusively bottomed, and is lower than it's been since the very deep and very painful "recession we had to have" in 1990.  

My conclusion:  we are likely to face much more than a "growth slowdown" or a "soft landing".  The consensus always gets this wrong.  It starts off by saying monetary policy changes will have little effect, then shifts to forecasting a "soft landing".  Then, as the data worsen, the consensus says, "well, we might have a mild recession".  At the bottom of the recession, the consensus doubts that there will ever be a recovery, and if there is, opines that it will be slow.

The only factor which might mitigate this recession is a rapid rebound in China. The Chinese government is finally becoming more serious about stimulating demand, but there are always lags involved.  Plus, the traditional route to stimulate the economy in the past has been by force-feeding the housing market.  Given the steady decline in the population growth rate, will that work this time?  And if European and US economic activity are slowing as fast as I think they are, will any Chinese stimulus be effective?  We shall see!