The chance of Australia plunging into recession has risen as high as 70 per cent, according to some economists, on the back of the Reserve Bank of Australia’s aggressive rate hikes which at this stage have no end in sight.
With nine consecutive hikes since May last year, Australians are feeling the pinch when it comes to their mortgage repayments and some of their worst fears are now potentially playing out.
A third of Australians put a recession in 2023 as their top fear and one in five said higher interest rates was their biggest concern, according to a CPA Australia poll.
Macroeconomics Advisory chief economist Stephen Anthony has predicted the chance of an Australian recession is as high as 50 to 70 per cent in the next 12 to 24 months due to soaring interest rates and a slowdown in China’s economic activity.
“If we’re going to have a recession, I think it’s going to be in 2024,” he told the Sydney Morning Herald.
“The impact of higher interest rates on household balance sheets will really be felt next year.”
IFM Investors chief economist Alex Joiner agreed the next 12 to 24 months would be tough with Australia currently walking a “tightrope” when it comes to recession.
Others however, like ACY Securities chief economist Clifford Bennett, didn’t mince his words after Tuesday’s 0.25 per cent rate hike from the RBA – saying the bank’s statement all but confirmed that Australia was headed for a recession this year.
“Not only does the RBA see achieving a soft-landing for the economy as a ’narrow’ possibility, it foresees significant monetary tightening over coming months,” he said.
“The RBA highlighted that while global inflation is dropping and the economic outlook softening, it is important to curtail inflation as it already exists. Before expectations of high inflation become ‘anchored’.
“They are saying it is vital to get inflation back down quickly toward 3 per cent before economic participants become used to the idea of it remaining high. With headline inflation at 7.8 per cent and core inflation at an astounding 6.9 per cent, monetary policy must necessarily be tightened further.”
Mr Bennett said unlike the US Federal Reserve Chairman, who spoke of a couple of hikes to come, the RBA’s statement suggested rate hikes over several more months, adding that property prices would continue to dive.
KPMG chief economist Dr Brendan Rynne also believes there is a recession risk for later this year.
“Global economic conditions remain highly volatile, and with Australia’s heavy dependence on trade, any global slowdown is likely to cause a compounding negative effect on the local economy,” he said.
“The RBA’s line “These [global] uncertainties mean that there are a range of potential scenarios for the Australian economy” means the RBA is not wholly discounting the risk of a recession materialising later in the year, as international and domestic demand slows from tighter monetary conditions around the world.”
It comes as more than 13 million Australians aren’t confident in the RBA will be able to ease the cost of living pressures and inflation, according to research from Compare the Market.
It also revealed that 30 per cent of borrowers are worried they’ll have to sell their property due to rising rates with homeowners in for a turbulent time – with one economist predicting interest rates are unlikely to drop again before 2025.
Despite some economists forecasting interest rates to be slashed again from mid this year,
rate cuts are unlikely to take place unless there is a rise in the unemployment rate, according to Bank of Queensland chief economist Peter Munckton.
“If the RBA forecasts of inflation of almost 5 per cent and only a modest rise in the unemployment rate come true there is little chance of a rate cut this year,” he explained. “Indeed, an inflation forecast of 3 per cent by mid 2025 suggests minimal chance of a rate cut prior to 2025.”
On the six of the nine occasions that inflation has been higher than 5 per cent over the past 100 years it has taken more than one year for inflation to fall, he added.
“The feedback from firms was that it remained significantly harder at the end of last year to find workers than it was during the peak of the mining boom,” Mr Munckton noted.
“Even with a substantial slowing of the economy a rise in the unemployment rate is unlikely until well into the second half of the year in line with the RBA’s forecast.
“The unemployment rate in the US remains near decade-lows despite a weakening economy.”
Michael Chan, from insolvency specialist firm Jirsh Sutherland Principal, added the “perfect storm is brewing” with the cost of living increasing, the mortgage cliff looming for Aussies as well as falling house prices.
It could spell financial disasters for some, he added.
“When rising interest rates are coupled with inflationary pressures, past trends have shown a corresponding rise in bankruptcies,” he warned.
“There are distinct correlations: there was a sharp economic slowdown in the mid-90s – following the 1991 recession — when the cash rate and bankruptcies rose simultaneously; bankruptcies and the cash rate were almost in lock-step during the 2007-2008 GFC; and it’s a similar situation now.”
Judo Bank economist Warren Hogan wants to see the RBA get on with aggressive rate rises, believing that rates need to hit between 4. and 4.5 per cent – but added that the focus on bringing down household spending could be the wrong way to look at things.
“Economists/commentators are constantly looking to the household sector for the much anticipated economic slowdown,” he said.
“While this will be a factor, the real hit to eco activity could well come from business failure. After many years of super low insolvencies, they are about to rise.”
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