Inflation battle will determine winner of recession war
Australia's prospects of avoiding recession hinge on the global battle against inflation, with an alarming new report highlighting the likelihood of a recession in 2023 or soon after.
The consensus that a recession is looming is becoming more difficult to ignore with each passing week, and an alarming new report only reinforces those economic fears.
The latest Econosights report by AMP senior economist Diana Mousina makes a compelling case for economic deterioration.
The battle to overcome inflation is shaping as the key determinant in the war against recession.
Ms Mousina said history indicates there is a good chance the end of central bank’s tightening cycle will result in some sort of crisis or downturn.
“Recession indicators show that the risk of a recession or downturn remains high and recent issues with US regional banks and Europe’s Credit Suisse show the risks associated with sharp rises in interest rates,” Ms Mousina said.
“Despite the recession concerns, the global economy turned up in early 2023, with economic activity looking better in the US and Europe.
“We don’t see a deep recession occurring in 2023 across the major economies because we think inflation will decline faster than expected this year, however, if inflation proves to be sticky at 5-6 per cent throughout 2023, then central banks will be forced to hike rates more through the year, which will then risk a recession in 2024.”
While Australia is no stranger to the pressures associated with interest rate rises, having endured ten successive Reserve Bank of Australia (RBA) hits to borrowers’ budgets, fears of a contagion spreading from the United States are of primary concern.
US economists at the Social Science Research Network this week released research indicating that nearly 200 banks are at risk of the same sort of collapse as the one at Silicon Valley Bank.
Recession at a time when interest rates are higher than they’ve been in well over a decade would certainly put a few mum and dad retailers to the wall.
- Ed Thwaites, Director, Herron Todd White
Europe is not without its own banking concerns that could contribute to global recessionary pressures.
Banking giant UBS has stepped in to buy troubled rival Credit Suisse for almost $3.25 billion, in a deal orchestrated by regulators to avoid further turmoil in the global banking system.
Recession would spell serious trouble for many Australia borrowers, with those reliant on retail jobs and businesses arguably most at risk.
Ed Thwaites, Director, Herron Todd White, said that in the wake of an unprecedented retail market boom some softening would be manageable but a crash could have dire consequences for many families.
“The Reserve Bank is doing all it can to stem high inflation levels and this is the only lever they have to pull - and they’re giving it a good yank,” he said.
“Many pundits note that the only thing that will put a real dampener on current levels of inflation is a recession, or hard landing as the RBA puts it, because I guess saying ‘we’re deliberately plunging our country into recession’ doesn’t have a great ring to it.”
“Let’s assume that we do go into recession at a time when interest rates are higher than they’ve been in well over a decade; that would certainly put a few mum and dad retailers to the wall.”
Rate rises still massively unpopular
Australians are losing confidence in the Federal Government and RBA’s ability to ease inflationary pressures and the cost of living with the majority saying hiking interest rates higher is not the solution, according to new research from Canstar.
A recent survey found that more than half (52 per cent) of Australian adults are not confident the Reserve Bank and Government will be able to ease inflation and the cost-of-living pressures this year.
Canstar’s finance expert, Steve Mickenbecker, said households paying off a loan on either their own house or on an investment property are right at the pointy end of interest rate increases and were rightly nervous.
“There is a sense of urgency added when you consider that around one-third of all home loan debt is on loans taken out over the last two years when property prices were high,” he said.
“Values are now being whittled back and disappearing equity is piling on further pressure.
“In spite of the record pace of interest rate increases, inflation is sitting stubbornly at 7.4 percent for the year to January 2023 and unemployment is at a low 3.7 percent, giving the Reserve Bank little encouragement to hold back further rate increases.”
Inflation falling but pace is paramount
AMP’s report concluded that a “deep recession” across the major economies this year is still unlikely because inflation is expected to decline faster than expected.
The ‘big if’ is what happens if inflation eases off but still sits well above the RBA’s desired 2-3 per cent band.
“If inflation proves to be sticky at 5-6 per cent per annum throughout 2023, then central banks will be forced to hike rates more through the year which will risk a recession occurring in 2024,” Ms Mousina said.
She said there were already tell-tale signs of Australia’s economy slowing down.
“December quarter GDP growth disappointed, retail spending is slowing, wages growth has risen slower than expected and the pace of jobs growth is lower compared to 2022 levels.”
But it wasn’t all doom and gloom, at least for 2023. The following year was on shakier ground.
“The turn-up in US and European data in early 2023 reduces the risk of recession in the first half of the year, even with the recent issues in the financial sector that policymakers are trying to control, and you could also argue that central banks are now likely to pause hiking sooner given the financial stability risks which reduces the risk of a recession, however, the banking sector troubles are also a warning sign around the future risks associated with central banks pushing hard to slow the economy through rate hikes.
“So, future risks of a recession are still elevated.”