Australia armed to fight recession

Although the cost-of-living pressures, sharp interest rates, a global downturn, and recessionary attitudes point towards a sharp slowing in the Australian economy next year, AMP economist Shane Oliver said Australia “should” be able to avoid a recession.

Pointing towards Australia’s buffers against a recession, Mr Oliver said business investment outlook was “solid”, there was still a large pipeline of home building work, energy prices were supporting national income, immigration was rebounding, and the central bank had moved into a “more cautious” rate hike approach.

The Reserve Bank of Australia (RBA) has been “hell bent” on bringing down inflation by increasing the cash rate to 2.85 per cent, following seven consecutive hikes.

However, October and November’s 25-bp bumps indicated an easing from the aggressive four 50-bp hikes prior.

The rapid hikes come as inflation in Australia is expected to reach 8 per cent by the yearvs end, but Mr Oliver said inflation was “less of a problem” in Australia compared to global economies.

The International Monetary Fund estimated countries accounting for about one-third of the global economy will experience at least two consecutive quarters of contraction this or next year, forecasting Australia’s GDP to drop to 1.9 per cent in 2023.

Given the global pressures, rising global inflation, and the gloomy financial commentary of late, one could be forgiven for thinking that recession was inevitable in Australia, Mr Oliver said.

But, he noted that the chances of avoiding a recession were higher.

“We would put the risk of recession in Australia at around 40 per cent which is high, but we should be able to avoid it with a 60 per cent probability. The risk is higher in other major countries,” Mr Oliver said.

As the central bank attempts to strike the right balance with lifting interest rates, the tactics have been recently questioned at a Senate economic committee meeting after its run of aggressive hikes.

However, Mr Oliver explained the central bank’s 2–3 per cent target was of “utmost importance” as history teaches us.

“The 1970s experience highlights that failure to do so will lead to even worse economic conditions and a continuing rough time in investment markets,” Mr Oliver said.

“To bring demand in the economy back into line with supply some economic slowdown is required to help get inflation back down. Hence the RBA has been raising interest rates.”

Australia’s got buffers 

While the economic and financial commentary has been particularly gloomy with talk of “dire”, “grim” and “bleak” tossed around, Mr Oliver said Australia had strong buffers to avoid it.

“Business investment is expected to grow by around 5 per cent over the year ahead,” Mr Oliver said.

The latest Equifax Quarterly Commercial Insights — September 2022 report revealed business credit applications grew 3.1 per cent in the quarter despite economic volatility.

In addition, while building approvals had fallen, since the uptick following the HomeBuilder grants, there was a “large pipeline” of home building work to “cushion” the downfall, Mr Oliver said.

“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,” Mr Oliver said.

While the surge in energy prices has hit household budgets, it’s providing a “big boost to national income”, he explained.

“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,” Mr Oliver said.

“This in turn is helping reduce the budget deficit and providing greater fiscal flexibility for the Australian Government.”

As the government works through its backlog of visa applications, put on hold during the pandemic, the labour shortage and tight jobs market is expected to ease.

Further, the boost in immigration will help head off a surge in wages growth — a factor that could contribute towards inflation and in turn recession risks.

“The key is that there are enough other reasons why, although economic growth is likely to slow sharply from 3 per cent this year to around 1.5 per cent next year, we should be able to avoid a recession,” Mr Oliver said.

[Related: Australia won't be spared global recession, Treasurer warns]