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Is a recession in Australia inevitable?

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5 minute read

Signs may be pointing to a sharp slowdown in the local economy next year.

While Australia’s economic growth is expected to slow sharply next year, AMP chief economist, Dr Shane Oliver has argued that the country should be able to avoid a recession.

In a recent market update, Dr Oliver labelled economic and financial commentary as “particularly gloomy”, driven by inflation, energy prices, interest rates, the risks of a global recession, the war in Ukraine, other geopolitical risks and the downturn in China.

Putting the odds of a recession at around 40 per cent, Dr Oliver predicted that economic growth in Australia would likely drop from 3 per cent in 2022 to around 1.5 per cent in 2023.

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He suggested that some economic slowdown would be required to bring "demand in the economy back into line with supply", helping curb runaway inflation.

“With households most vulnerable to higher interest rates due to high levels of household debt and the double whammy from falling real wages, consumer spending is set to slow sharply,” said Dr Oliver.

“And RBA Governor Lowe has noted on several occasions that ‘we are travelling along a narrow path here’ in terms of being able to return inflation to target and avoid a recession. However, it’s not inevitable that Australia will slide into recession.”

Dr Oliver has put forward seven key reasons as to why a recession should be avoidable:

1. Solid business investment outlook

He said that business investment plans in the year ahead remain strong, with the ABS capital spending intentions survey sitting around 15 per cent higher than it was a year ago.

2. Large pipeline of home building work

While approvals to build new homes have fallen significantly due to the end of the HomeBuilder grant and rising rates, Dr Oliver said that home completions have yet to catch up with the surge of home building approvals clocked during the pandemic.

“The large pipeline of work yet to be done will likely provide a floor for home building, preventing a plunge in dwelling investment that would normally flow from a 25 per cent fall in approvals,” he said.

3. High energy prices

The recent surge in energy prices has delivered a “big boost” to the national income through the earnings of energy companies, the AMP chief economist said.

“This is evident in strong trade surpluses and contributed to a $48 billion improvement in the budget deficit last financial year and $42 billion this financial year. This in turn, is helping reduce the budget deficit and providing greater fiscal flexibility for the Australian government.”

4. Potential fall for the Australian dollar

If global economic conditions collapse and lead to a sharp fall in Australian commodity prices and the country’s export earnings, Dr Oliver said it was likely that the dollar would also fall.

“This in turn will help support the Australian economy by making our exports more competitive as it did in the Asian crisis, tech wreck and the GFC,” he added.

5. Rapid rebound in immigration

“A surge in new visas for arrivals as the backlog is worked through and in monthly data for net permanent and long-term arrivals point to a rebound in immigration levels,” said Dr Oliver.

The expected surge is set to ease labour shortages and the tight jobs market, helping to prevent wages growth from surging to levels beyond those consistent with the inflation target.

6. The ‘problem’ of inflation

Inflation may be less of a problem in Australia than it is elsewhere, Dr Oliver suggested, citing lower inflation, less growth in energy prices and longer-term inflation expectations, which remain consistent with the RBA’s target, among a number of other factors.

“There are reasons for optimism that the RBA won’t have to raise rates too much further (and not to the 4 per cent plus that the money market is assuming, but which would most likely tip us into recession),” he said.

7. Slowdown from the RBA

Finally, Dr Oliver noted that much will come down to how aggressive the RBA is in hiking rates.

“After an initial run of rapid rate rises that returned the cash rate to more normal levels, it has since slowed the pace down to better assess their lagged impact, allow for the global downturn, and hopefully strike ‘the right balance between doing too much and too little’,” he said.

“In motoring parlance ‘speeding kills’ — the initial acceleration in rates was necessary to catch up to inflation but to continue at that pace would run the risk of a serious accident that tips us unnecessarily into recession.”

Is a recession in Australia inevitable?

Signs may be pointing to a sharp slowdown in the local economy next year.

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Jon Bragg

Jon Bragg

Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.

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