Written by Michal Lancemore
The standard definition for a recession is two consecutive three-month periods where output shrinks – ie. two consecutive quarters of negative growth.
Prior to 2020, we went 30 years without a recession. We even managed to miss the “great recession” after the GFC – which says a lot about the resilient of our economy and, more importantly, the judgment of the Reserve Bank. However, general consumer confidence levels are low (see below):
Further to my exciting Tuesday Chat this week, below are a few dot points citing reasons for and against an Australian Recession:
Reasons against a recession:
- We have lower headline inflation than the US and Europe
- We have lower wages growth than US and UK
- We are still a major exporter of commodities
- The RBA is focusing on expanding growth rather than containing inflation
Reasons for a recession:
- China – more covid restrictions and/or a sharp downturn could be very harmful to our economy as they are our biggest export customers.
- Higher unemployment than anticipated
Given the consensus is that the whole world is heading for recession, the RBA is delicately navigating monetary policy and the size and timing of rate increases. If they go against the US Federal Reserve policy of continuing to hike rates, we may see our dollar fall even further – as investors will flock to their higher interest rates and strengthen the US dollar. However, if the RBA does decouple from the pressure of lifting rates because of the US, then perhaps the US will enter a recession and bring down inflation as a consequence? Time will tell (very soon).
One thing we do know is that global economic growth, including growth in Australia, will be far slower over the coming two years.
It’s important to note: recessions don’t always mean heavy pain. If unemployment doesn’t surge, and if we recover quickly afterward, Australia could get back to the sweet spot: low unemployment, strong growth, and inflation under control.
My two cents is that we will fall into recession, but it is likely to be short and sharp as the RBA cuts rates to stimulate growth.