Australia’s Risk of Recession Looms as Interest Rates Inch Higher, Warns AMP Economist

…By Judah Olanisebee for TDPel Media. Australia’s Risk of Recession Heightens as Interest Rates Increase, Warns AMP Economist

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Concerns are growing that Australia could face a recession by the end of 2024 if the Reserve Bank raises interest rates once more.

The latest national accounts data reveals a meager 0.2 percent growth in the Australian economy during the March quarter of 2023, marking the weakest expansion in three months since the mid-2021 lockdown period.

The release of this data coincided with the Reserve Bank’s 12th interest rate hike since May 2022, pushing the cash rate to an 11-year high of 4.1 percent.

AMP’s deputy chief economist, Diana Mousina, has warned that a single additional 25 basis point rate increase, taking the cash rate to 4.35 percent, could trigger a recession.

Expressing concerns over the Reserve Bank’s aggressive approach, Mousina suggests that such a move could inflict unnecessary economic pain on households, especially when forward-looking inflation indicators already point to lower price growth in the next six months.

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Risks of Recession and Rising Inflation:

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A recession in 2024, as projected by AMP, would mark the first economic contraction driven by interest rate rises since 1991 when interest rates reached 18 percent in late 1989.

While inflation dropped to 7 percent in the March quarter (down from a 32-year high of 7.8 percent in the December quarter), it still remains above the Reserve Bank’s target range of two to three percent.

The Commonwealth Bank anticipates the Reserve Bank to further raise rates to 4.35 percent by August, with the potential of reaching 4.6 percent, the highest since November 2011.

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Divergent Views on Rate Increases:

Gareth Aird, the head of Australian economics at the Commonwealth Bank, acknowledges the Reserve Bank’s aggressive tightening cycle, attributing it to the current elevated rate of inflation.

Aird suggests the possibility of a 25 basis point rate hike as early as July, with potential additional rate increases in both July and August.

On the other hand, Treasurer Jim Chalmers argues against blaming the minimum wage increase for the rate hike, emphasizing that ordinary working people are already bearing the burden of rising rates.

Implications for Borrowers and Economic Outlook:

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The recent 0.25 percentage point interest rate hike will lead to higher monthly repayments for borrowers, with an average increase of $97 for a $600,000 mortgage.

Monthly repayments for this average borrower will rise to $3,730, reflecting a total increase of $17,088 annually since May 2022.

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As economic activity weakens due to higher interest rates impacting consumer spending, residential construction, and business investment, the potential for a recession looms.

Conclusion:

The possibility of Australia sliding into a recession amid rising interest rates poses significant concerns for the economy and its citizens.

The Reserve Bank’s monetary policy decisions and their potential consequences have sparked debate among economists and policymakers.

While some argue for the necessity of higher rates to tackle inflation, others express apprehension about the impact on household finances and economic growth.

The coming months will be critical in determining the trajectory of Australia’s economy and whether a recession can be averted or not.

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