Fears unnecessary recession to hit Australia

However, economists fear that the Reserve Bank of Australia (RBA) also risks plunging the country into a recession “we don’t have to have” all by itself if it continues to push through super-sized rate hikes to tackle the worst inflation in over three decades.

The RBA is expected to reveal on Tuesday its sixth rate hike, with a predicted 0.5 per cent rise, taking interest rates from a record low of 0.1 per cent from earlier in the year to a nine-year high of 2.85 per cent.

Some have even predicted that rates could go as high as 4.2 per cent by the middle of next year.

But the RBA is also dealing with a global economy already experiencing shockwaves.

Stream more finance news live & on demand with Flash. 25+ news channels in 1 place. New to Flash? Try 1 month free. Offer ends 31 October, 2022 >

UK mini-budget causes financial crisis

Last week, UK Chancellor of the Exchequer Kwasi Kwarteng released his mini-budget, which announced controversial plans for £45 billion ($A78 billion) of unfunded income tax cuts for high earners, alongside a £150 billion ($A260 billion) two-year energy subsidy and price freeze program.

It prompted fears that inflation – already close to 10 per cent in the country – would skyrocket and caused the British pound to slump to its weakest in history.

The Bank of England was forced to step in and buy government debt to avoid a crisis in the UK financial system.

Clifford Bennett, chief economist at ACY Securities, said the Pound remains vulnerable.

“The United Kingdom remains at the end of the energy chain from Russia and therefore will continue to face extreme energy prices and even actual shortages and blackouts as winter takes hold,” he said.

“Then there is the matter of a change of leadership, a slowing economy, widespread super-inflation and a central bank relentless in its further attack on consumers and businesses alike via interest rate hikes.”

‘Sustained’ recession

The latest UK tax cuts and budget were not well received by the market and were “mere window dressing to the UK’s bigger problems,” Mr Clifford said.

“The economy is headed for a serious, perhaps sustained, recessionary period,” he said.

“The hangover effect from the Covid stimulus remains in full force too. There is very little to see on the horizon that could in any way be viewed as supportive of either the economy or the currency.”

Paul Gruenwald, global chief economist for ratings’ agency S&P Global, said the global economy was struggling under the combined weight of rising interest rates, increased European energy insecurity and the lingering effects of Covid-19, especially in China.

He along with Moody Analytics have predicted a mild recession in the US.

Australian Federal Treasurer Jim Chalmers’ expectations of a global recession have also gone from “possible to probable” after recent economic turmoil.

“I do consider it a bit of a cautionary tale. If you don’t get the cost-of-living relief right, if you don’t rebuild those fiscal buffers against global turbulence, if you don’t get those things right, there are costs and consequences,” he said.

‘Rising risk’

AMP Capital chief economist Shane Oliver has put the chance of a domestic recession at close to 40 per cent and said rising rates would hit homeowners harder than during the GFC, due to higher mortgage repayments as a result of record levels of debt.

He said there was a “rising risk of a policy mistake” from the RBA with rate hikes sending Australia into recession.

“This is the recession we shouldn’t have to have,” he told The Australian.

Dr Oliver said the RBA was being influenced into raising rates faster by its overseas peers, which were facing much more severe inflationary outbreaks.

“The risk is the RBA is seeing all these other central banks being hawkish, and thinking that if we don’t go along with it the Aussie dollar will crash and we will have a financial crisis,” he said.

“The problem is we don’t have the same inflation pressures, which is at 9-10 per cent in Europe and the UK. We have wages growth of 2.6 per cent – in the US it’s around 6 per cent.”

Peter Esho, co-founder at Wealthi, a Sydney-based property investment company, said as central banks continue raising rates, their attention will start to shift from inflation to financial stability.

“We saw this last week when the Bank of England stepped in to stop a financial disaster taking place in the UK economy,” he said.

“I suspect there’s more to come with strong rumours in markets this weekend about a large European financial institution facing liquidity problems.”

Overall, it’s hard to think that there won’t be more financial stability problems in the short term, he added.

“If we do see another Lehman-style collapse, or something close to it, central banks will quickly shift their focus from fighting inflation to fighting to ensure financial stability. That will be a turning point. The fear of a financial meltdown is much larger than the fear of high inflation,” he said.

The next two weeks are extremely important for the interest rate outlook of most major developed economies, he added.