Following one of the fastest monetary policy tightening cycles in history, AMP deputy chief economist Diana Mousina has warned that a recession is still a distinct possibility in advanced economies including Australia and the US.
“Usually whenever we get a very significant increase to interest rates, just like we’ve had right now, there is some sort of reckoning – a day of reckoning – or some sort of crisis that eventuates through that,” she told a recent AMP webinar.
Ms Mousina highlighted historical data out of the US which shows that tightening cycles by the Federal Reserve usually end in some kind of crisis.
“This year we had the US banking crisis which occurred in March. You could say that maybe that was the crisis that eventuated with this tightening cycle. But I find it hard to believe that it will just end with that,” she argued.
“I think that we will see some other sort of … whether it’s a mini crisis, or some sort of more significant economic downturn in 2024.”
In line with this view, American Century Investments co-CIO of global fixed income, Charles Tan, warned this week that the US economy will likely dip into recession in the first quarter of 2024.
Mr Tan suggested that the rapid pace of rate rises seen to date will prevent a soft landing in the world’s largest economy, with a hard landing seen as being far more likely.
“The key drivers of prior soft landings for the US economy are absent today,” he stated.
“Instead, American Century believes the opposite conditions exist. We believe pressures from the rapid pace of rate rises and the prior spike in inflation, along with other factors, may trigger a recession by spring in the US.”
According to Mr Tan, only four of the Fed’s 12 tightening cycles since 1960 have ended in soft landings. In each of these cases, the Fed adopted a modest pace of tightening, inflation did not spike, and banks eased their lending standards, in contrast to the latest cycle.
“The US Federal Reserve raised interest rates at a record pace of 5.25 percentage points from March 2022 through to July 2023, with inflation having spiked sharply,” Mr Tan noted.
“Headline inflation surged from 1.7 per cent in February 2021 to 9.1 per cent just 16 months later. In addition, banks tightened their lending standards for all consumer and business loans in 2023.
“All of this makes recession in the US more likely than a soft landing, which will have deep ramifications for the world’s largest economy, which will also weigh on global economic growth.”
On the risks of a downturn locally, Ms Mousina pointed to the recession of the early 1990s.
“The RBA kept increasing the cash rate. Everything looked okay. The unemployment rate fell quite significantly. And then the unemployment rate started rising very, very quickly again as we went into that recession, and the RBA cut rates quickly,” said Ms Mousina.
“Things can seem okay until they’re not, which is why financial markets are still pricing in a decent chance for a recession.”
AMP is attributing about a 40 per cent chance for a recession in Australia next year.
“Hopefully it’s a mild recession because there are still some positive savings buffers that consumers have, which could shield the consumer from a downturn, but it is still a risk for next year,” Ms Mousina said.
As the risk of recession looms, global growth is also expected to be softer next year.
“US GDP growth is likely to be between around 1.5 or 2 per cent,” Ms Mousina predicted.
“The Chinese economy should do a bit better next year based on some of the data that’s been coming out recently and some of those piecemeal measures that the Chinese policymakers have done. We think that Chinese growth will look a little bit better, but overall global growth will be pretty soft next year.”
