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Economist puts risk of local recession at 30%

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Recession risk remains relatively low in Australia but an economic downturn is nevertheless possible, an economist has said.

While recession risk is high globally, in Australia it sits around 30 per cent, AMP’s chief economist, Shane Oliver, said in his latest market update.

Last week saw the release of the local jobs data, and while the jobless rate was reported at a 38-year low 3.4 per cent, economists have labelled the overall data “messy”.

Namely, employment and hours worked both fell, however reflecting the combination of school holidays and a spike in COVID and flu absences.

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But it’s the soft lift in wages growth that has many predicting another 50-basis point rate hike in September.

Dr Oliver is a little more cautious than many of his peers, noting that while “we lean to the RBA hiking by another 0.5 per cent next month, we think it’s a close call as to whether they hike by 0.25 per cent”.

Citing lags in how monetary policy impacts the economy and the “huge blow” to real wages, Dr Oliver said, “it makes sense for the RBA to slow the pace of tightening to give time to assess the impact of the rate hikes so far”.

“Moving by 0.4 per cent might be a good compromise,” he added.

Looking at the global picture, where the economic situation is a lot bleaker, Dr Oliver explained that while recession risk is high, the good news is that upstream price pressures are continuing to show signs of cooling, with global business surveys reflecting improving delivery times, falling order backlogs and falling price and cost pressures alongside declines in oil and metal prices.

“This is being reflected in an ongoing downtrend in our Pipeline Inflation Indicator. This should start to take pressure of central banks and at least allow a slowing in tightening in the next six months — hopefully in time to avoid deep recessions,” Dr Oliver said.

In its minutes from the August policy meeting published last week, the RBA reiterated it is not on a pre-set rate path, but confirmed it expects to take “further steps” in the process of normalising monetary conditions.

The bank did, however, appear more conscious of the downside risk to growth, predicting slightly more muted growth of 3.25 per cent in 2022 and 1.75 per cent in 2023 and 2024.

Elsewhere, New Zealand’s central bank hiked its cash rate by 0.5 per cent taking it to 3 per cent, while the Fed’s chair Powell is expected to remain hawkish in dealing with inflation but conscious of the probable economic downturn.

Economist puts risk of local recession at 30%

Recession risk remains relatively low in Australia but an economic downturn is nevertheless possible, an economist has said.

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Maja Garaca Djurdjevic

Maja Garaca Djurdjevic

Maja's career in journalism spans well over a decade across finance, business and politics. Now an experienced editor and reporter across all elements of the financial services sector, prior to joining Momentum Media, Maja reported for several established news outlets in Southeast Europe, scrutinising key processes in post-conflict societies.

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