Australia's risk of a recession has fallen from one-third to about 20 per cent, with home prices only set for high single-digit percentage falls, according to independent economic analyst Gerard Minack.
In April, Mr Minack warned of one-in-three chance Australia would experience a recession in 2018 — its first in 27 years — but now he believes there is just a one-in-five chance the economy will shrink for two consecutive quarters.
Mr Minack told The Business that it is a pick up in business confidence and non-mining investment that is likely to stop Australia's economy going backwards.
"We have seen a significant pick up in business confidence," he said.
"If that's all I had, I wouldn't have changed things much, but we're also seeing corporates deliver on their optimism in terms of the labour market — we've had a cracking six months for hiring.
"And, finally, there's a twinkle in their eye when it comes to business investment."
The latest business investment figures from the Australian Bureau of Statistics are due out on Thursday, and the typical forecast is for a 1 per cent rise over the September quarter.
Not that the renowned bear has suddenly turned into a bullish optimist.
"There's still a lot of problems out there, and my base case is still that we've got a year of exceptionally weak, tepid, anaemic growth heading into next year," Mr Minack added.
"But that downside risk, it's still there, but it's not quite as big as I thought it was three or six months ago."
Weak wages and expensive housing remain the big risks
The two biggest handicaps for the Australian economy remain weak wages growth and over-priced housing, according to Mr Minack.
He said there is some chance that rising employment will help the former.
"The best tonic for consumers, rather than capex per se, would be a pick-up in wages which, ultimately on measures we have, are at rock-bottom multi-decade lows, and that also is getting the consumer down," he observed.
On the issue of home prices, Mr Minack remains downbeat, but is not expecting a severe crash.
"My base case for now is it's a high single-digit percentage decline across the board, there'll be a lot of unevenness there but that sort of order of magnitude," he said.
"But then the even bigger uncertainty will be how do people respond to that, because it's obviously been something that's been helpful for sentiment and has encouraged people to spend more of their income than they have historically.
"And if they take fright then we have a recession, if they just get mildly cautious and conservative then that's probably the base case of very weak growth and, of course, if they don't respond at all then we can talk about bright times ahead."
Shares look expensive but could still push higher
As for the recent global share market rally, Mr Minack said it could have at least another year to run.
"Low volatility, low interest rates, steady inflation and high profitability, we've got them all," he said.
"You could take the view that conditions are as propitious as we've seen them in several decades to get a proper equity bubble.
"Now, by definition, a bubble is not sustainable, but you can't rule out that over the next one or two quarters we see equities put in some great returns building on the strength we've had this year as investors factor in what looks like a fairly cloudless sky on a 12 to 18 month view – cloudless in terms of the risks we can forecast."
However, while Mr Minack has traded his claws for horns over the next year, he remains a bear on the medium-term outlook.
"I don't think it's remarkable we've got an expansion underway globally, I think it's remarkable that it's taken eight or nine years of zero rates to get any growth at all," he said.
"To me it's symptomatic that we still are facing this secular stagnation — this period of low growth, low rates and this current expansion will be, I think, quite temporary."