If the experience of the past two decades is any guide, Australia can avoid a recession even at a time of global economic uncertainty.
And the scale of rate rises in 2022 and 2023 could determine whether Australia’s economy continues to grow without interruption, even as borrowers face the most severe pace of increases in nearly three decades.
The 2020 Covid lockdowns marked Australia’s first recession since 1991.
But in between, Australia avoided entering a technical recession, twice even as the US did – with the downturn defined as two or more consecutive quarters of gross domestic product falling.
This meant that Australia’s economy continued to grow, with only one negative quarter in 2008, even as the US suffered a recession from 2007 to 2009 during the global financial crisis.
Australia also avoided a recession in 2001 when the bursting of the dot-com tech bubble plunged the US into recession, just four years after Australia weathered the 1997 Asian financial crisis.
The pattern is widely expected to be repeated again in 2022 and 2023, although the US, the world’s largest economy, is most likely to enter a recession again.
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Australia could avoid a recession even at a time of global economic uncertainty if the experience of the past three decades is any guide (pictured are shoppers in Sydney’s Pitt Street Mall)
That’s because the US has a worse inflation problem than Australia, despite inflicting even more intense interest rate hikes on borrowers.
Australia vs USA
INTEREST: Australia’s cash rate is at a seven-year high of 2.35 percent, and the OECD expects an 11-year high of 3.6 percent in 2023
US target interest rate at 14-year high of 3 to 3.25 percent, with OECD expecting it to reach 16-year high of 4.5 to 4.75 percent in 2023
RECESSIONS: Australia suffered recessions in 1991 and 2020
The US suffered recessions from 1989 to 1991, in 2001, from 2007 to 2009 and in 2020
INFLATION OVERVIEW: Australia’s consumer price index grew 6.1 percent in the year to June, and the Reserve Bank expects it to hit a 32-year high of 7.75 percent in 2022
US headline inflation rose to the highest level in 41 years at 9.1 per cent. in June, but in August it decreased to 8.3 per cent.
While the Reserve Bank of Australia has raised interest rates five times since May – from a record low of 0.1 per cent. to the highest level in seven years of 2.35 per cent, the US central bank has been even more aggressive.
The Paris-based OECD expects Australia’s cash rate to rise to an 11-year high of 3.6 per cent in 2023 – with borrowers having already weathered four major rate hikes of 0.5 percentage points since June.
But it expects the Fed to continue raising its target rate from an existing 14-year high of 3 to 3.25 percent to a 16-year high of 4.5 to 4.75 percent in 2023.
Since June, American borrowers have weathered three mega interest rate increases of 0.75 percentage points.
US Fed Chairman Jerome Powell admitted last week that aggressive interest rate hikes in the US could trigger a recession.
“No one knows whether this process will lead to a recession or, if so, how significant that recession would be,” he said.
“We have to get inflation behind us. I wish there was a painless way to do it.
By comparison, Reserve Bank of Australia Governor Philip Lowe told a parliamentary hearing in Canberra this month that rate hikes that were too harsh would trigger a recession.
He is keen to avoid that with borrowers already facing the most severe hikes since 1994.
“My assessment, and the assessment of most of my colleagues, is that it would be incredibly debilitating for the economy and would plunge us into a sharp recession,” he said.
The US has a worse inflation problem than Australia, despite inflicting even more intense interest rate hikes on borrowers (pictured are prayer service protesters in New York’s Times Square this week)
Dr. Lowe nevertheless noted that inflation needed to be brought back within the Reserve Bank’s target of two to three per cent or ‘we have higher interest rates and a recession, which is damaging’.
Australia’s headline inflation rose 6.1 per cent in the year to June, and the RBA and Treasury expect it to reach a 32-year high of 7.75 per cent in late 2022.
The US, however, saw its corresponding headline inflation – also known as the consumer price index – hit a 41-year high of 9.1 percent in June.
US inflation, which is published monthly rather than quarterly like Australia, has since eased to 8.3 percent with more severe rate hikes and the prospect of a recession.
When Australia last suffered recessions – in 1991 and 2020 – the economy shrank on an annual basis because the two quarters of contraction during these technical recessions offset the previous quarters where GDP grew.
The Commonwealth Bank, Australia’s biggest home lender, expects Australia’s annual economic growth rate to halve to 1.4 per cent in 2023 from 3.6 per cent as recently as June this year.
US Fed Chairman Jerome Powell admitted last week that aggressive interest rate hikes in the US could trigger a recession (he is pictured in Washington DC)
Ryan Felsman, a senior economist at CBA’s online brokerage subsidiary CommSec, said Australia would avoid a recession simply because the RBA would be more cautious about raising interest rates than the US central bank.
“Probably the base stage is not for a recession here in Australia,” he told Daily Mail Australia.
‘The risk of global recession grows with interest rates being raised by central banks in a coordinated and synchronized manner.’
But the Commonwealth Bank and CommSec expect the RBA to stop raising interest rates in November when they hit 2.85 per cent, simply because house prices in Australia as a share of income are much higher.
“Could get another 25 basis points higher than that, but not much above three percent, while we think the U.S. is likely to see rates well above four percent,” he said.
‘The simple reason for that is that Australian households are more sensitive to interest rate rises given borrower indebtedness and we don’t think the Reserve Bank of Australia will be as aggressive as their US counterparts.’
By comparison, Reserve Bank of Australia Governor Philip Lowe this month told a parliamentary hearing in Canberra (pictured) that rate rises that were too harsh would trigger a recession – something he is keen to avoid with borrowers already facing the most serious increases since 1994
Treasurer Jim Chalmers has no control over the independent RBA’s interest rate decisions, but was confident this week that Australia would avoid a recession even if the US and the eurozone went into recession.
“First of all, I think we need to recognize that the global situation is worsening and the challenges in the global economy in the US, UK, China, Europe and elsewhere, these challenges are intensifying rather than disappearing and we will not become completely immune to it,’ he told ABC Radio National.
“Our expectation is that the Australian economy will continue to grow, but so will the challenges facing the Australian economy.”
Despite a string of interest rate hikes since May, consumers are continuing to spend and August retail sales rose 0.6 percent – marking the eighth consecutive monthly increase.
Cafes and restaurants saw a 1.3 per cent increase in trade last month, data from the Australian Bureau of Statistics showed.
Australian consumers are now spending big after building up their savings buffers during the 2020 and 2021 shutdowns.
Westpac senior economist Matthew Hassan said the retail sales figures showed that recent interest rate rises have so far failed to curb consumer spending.
“Rate hikes still appear to have little effect,” he said.
With consumption stalling and unemployment last month at just 3.5 per cent, Australia could avoid a recession even at a time of global uncertainty and a major slowdown in China – Australia’s biggest trading partner.
There are risks.
A stronger US dollar – as a result of higher US interest rates and reduced global risk appetite to buy stocks – makes the Australian dollar weaker.
This in turn makes inflation worse as imported goods become more expensive – making higher interest rates more likely.
But a weaker Australian dollar, now worth just 64 US cents, makes our exports cheaper, meaning there is the economic activity to make a recession less likely.