How Australia may avert another recession

How Australia may avert another recession

Australia may be able to escape a recession even in an uncertain economic climate for the rest of the world, if the last two decades’ worth of experience are any indication.

Furthermore, the level of interest rates in 2022 and 2023 may decide whether Australia’s economy continues to expand unhindered even as borrowers deal with the steepest rate of hikes in almost three decades.

Australia had its first recession since 1991 as a result of the COVID-19 lockdown in 2020.

But in the meanwhile, Australia twice escaped a technical recession, unlike the United States, where a downturn is defined as two or more quarters of declining gross domestic product.

That indicated that Australia’s economy was still expanding, with only one quarter of contraction in 2008, whereas the United States had a recession from 2007 to 2009 as a result of the Global Financial Crisis.

Just four years after Australia survived the Asian Financial Crisis of 1997, the U.S. entered a recession in 2001 as a result of the fall of the dot-com tech boom.

The trend is anticipated to repeat itself in 2022 and 2023 despite the likelihood that the US, the largest economy in the world, would experience another recession.

This is due to the fact that, while subjecting borrowers to even more drastic interest rate rises, the United States has a greater issue with inflation than Australia.

The US Federal Reserve has been even harsher than the Reserve Bank of Australia, which has increased interest rates five times since May, from a record-low of 0.1% to a seven-year high of 2.35 percent.

The OECD, located in Paris, predicts that Australia’s cash rate will grow to an 11-year high of 3.6% by 2023, with borrowers already having to bear the brunt of four higher rate rises since June.

However, it anticipates that the US Fed will continue raising its target interest rate, which is now at a 14-year high of 3 to 3.25 percent, in order to reach a 16-year high of 4.5 to 4.75 percent in 2023.

American borrowers have seen three significant rate increases of 0.75 percentage points since June.

Jerome Powell, the chairman of the US Federal Reserve, acknowledged this week that rash rate hikes in the US may trigger a recession.

Nobody can predict if this process would cause a recession or, if it does, how large it will be, he added.

We must put inflation in the past. I wish there was an easy method to do it.

There is not,

In contrast, Reserve Bank of Australia Governor Philip Lowe recently warned that excessive interest rate increases might trigger a recession before a parliamentary hearing in Canberra.

Given that borrowers are already seeing the most drastic rises since 1994, he is eager to avert that.

According to him and the majority of his coworkers, such a move would be very contractionary for the economy and would plunge the country into a deep recession.

However, Dr. Lowe warned that if inflation did not return to the Reserve Bank’s goal range of two to three percent, “we have higher interest rates and a recession, which is terrible.”

The RBA and Treasury anticipate that Australia’s headline inflation rate, which increased by 6.1% in the year to June, would reach a 32-year high of 7.75% in late 2022.

In contrast, the consumer price index, or similar headline inflation, in the United States reached a 41-year high of 9.1% in June.

Due to more pronounced interest rate increases and the possibility of a recession, American inflation, which is reported monthly rather than quarterly as it is in Australia, has subsequently softened to 8.3%.

Australia last had technical recessions in 1991 and 2020, and both times the economy contracted for two consecutive quarters, cancelling out the prior three quarters of GDP growth.

Australia’s yearly economic growth rate is projected by the Commonwealth Bank, the country’s largest mortgage lender, to drop from 3.6 percent in June of this year to 1.4% in 2023.

Australia would escape a recession, according to Ryan Felsman, a senior economist at CBA’s online broking subsidiary CommSec, only because the RBA would be more careful about increasing interest rates than the US Fed.

He told Daily Mail Australia, “Base case isn’t for a recession here in Australia.”

“The coordinated and synchronized increase in interest rates by central banks is increasing the probability of a worldwide recession,” the report states.

But since Australian home prices are substantially higher as a percentage of income, the Commonwealth Bank and CommSec anticipate the RBA to cease rising rates by November once they reach 2.85 percent.

“Could go another 25 basis points higher than that, but not much above three percent,” the man said. “We anticipate the US will definitely see interest rates well over four percent.”

We don’t believe the Australian Reserve Bank will be as active as their US colleagues since Australian families are more sensitive to interest rate rises given borrower indebtedness.

Despite not having any influence over the independent RBA’s interest rate choices, Treasurer Jim Chalmers expressed confidence this week that Australia will escape a recession even as the US and the Euro zone did.

First and foremost, he said, “I believe we do need to recognize that the world situation’s worsening and the issues in the global economy in the US, the UK, China, Europe and others, those challenges are growing rather than dispersing and we won’t be fully exempt from it.”

“We anticipate that the Australian economy will continue to expand, but that the obstacles facing the Australian economy will increase as well.”

Retail sales increased by 0.6% in August, marking the eighth consecutive month of growth, despite a series of rate increases since May.

According to figures from the Australian Bureau of Statistics, commerce in cafes and restaurants increased by 1.3% in the last month.

Following the accumulation of their financial reserves during the lockdowns of 2020 and 2021, Australian consumers are again making large purchases.

Retail sales numbers, according to Westpac Senior Economist Matthew Hassan, revealed that recent rate increases have so far failed to dampen consumer spending.

He remarked, “Increases in interest rates still seem to be having little effect.”

Despite global unrest and a significant downturn in China, Australia’s largest trade partner, might escape a recession thanks to stable consumption and a 3.5% unemployment rate last month.

The dangers exist.

The US dollar’s strength causes the Australian dollar to weaken as a consequence of lower global risk appetite for investing in stocks and higher US interest rates.

This worsens inflation since imported items become more costly, which increases the likelihood of increased interest rates.

However, since our exports are now cheaper due to the Australian dollar’s decline and its current value of 64 US cents, there is enough economic activity to reduce the likelihood of a recession.

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