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Australia headed for recession next year, Professor Steve Keen says

Associate Professor Steve Keen

Australia's credit binge will lead to a bust as soon as next year, with house prices to fall between 40 and 70 per cent and unemployment to rise sharply, Professor Steve Keen says.

The professor famously lost a bet when he predicted a catastrophic crash in Australian house prices following the GFC and had to walk from Canberra to Mount Kosciusko as a result.

But he says, this time, he is right and does not have his hiking boots at the ready.

"We have borrowed ourselves so much to the hilt that we are now dependent on that continuing to rise over time and it simply won't," he told the ABC's The Business.

Many believe the Reserve Bank has been a steady guiding hand to the Australian economy in the years since the GFC, but Professor Keen believes it has guided the economy "straight toward the shoals" by encouraging households to borrow with low rates which has led to asset bubbles.

"They don't know what they're doing," he said.

"Our debt level according to the Bank of International Settlements, private debt level, has gone from 150 per cent of GDP to 210 per cent of GDP."

He argued that means a large part of the growth that Australia has enjoyed since the GFC, while many other countries plunged into recession, has been fuelled by a 60 per cent rise in household debt.

"Ireland did the same thing when they called themselves the Celtic Tiger and they don't call themselves that anymore," he said.

"Spain was doing the same thing during its housing bubble and we've replicated the same mistakes.

He believes the Reserve Bank will be forced to take rates down to zero from their current level of 1.75 per cent as the economy continues to slow, but that will not stop the collapse of the credit binge that has kept the country afloat until now.

"[Lower rates] will suck more people in, it will suck more people in for a while and the [Reserve Bank] can delay this for a while by cutting the rates," he said.

Government deficit worries overblown, Keen says

He said the catalysts for the recession were the declining terms of trade, the continued fall in investment into the economy and the Federal Government's "stupid" pursuit of a budget surplus.

"The Government is frankly stupid about the economy and is obsessed about running surpluses when it is bad economics."

A major round of government stimulus that takes the deficit to 10 or 15 per cent of GDP and a massive uptick in foreign investment, especially into housing, would allow the country to avoid a big recession, according to Professor Keen.

But he said neither options were politically palatable.

He said worries about huge government deficits were overblown.

Professor Keen, who was formerly an associate professor of economics at the University of Western Sydney and is now at Kingston University in London, says economists and governments around the world have their thinking completely wrong on the issue of budget deficits.

He said the best way to prepare for the coming recession was to sell assets and reduce debts, but he admitted that was the type of behaviour which could set off a credit crunch.