Australia has avoided a recession despite experiencing its worst cost-of-living crisis in a generation, but there are now calls for a short and sharp recession to be unleashed to avoid a prolonged economic contraction.
The economy grew just 1.5 percent last year, which, excluding the 2020 pandemic, was the weakest annual growth since 1991, when aggressive rate hikes last caused a recession.
Rand Low, an associate professor of quantitative finance at Bond University, has urged Australians to cut back on discretionary spending – forgoing things like takeaway coffee, online subscriptions or nights out on the town – so that more spending does not worsen inflation.
Treasurer Jim Chalmers presents his third budget in a fortnight, with phase three tax cuts for low and middle incomes – but Dr. Low wants Australians to save that money instead of spending it.
“It’s true that if we eat out less and buy less ‘stuff’ it will impact the economy and push it into a recession,” he said. news.com.au.
“But what we’re looking at is that it may be necessary to have a mild recession for a year or so, rather than a ‘deep’ recession that could last several years.”
Treasurer Jim Chalmers (pictured) presents his third Budget in a fortnight, with phase three tax cuts for low and middle income earners – but Rand Low, associate professor of quantitative finance at Bond University, wants Australians to save that money
Inflation remains high despite 13 rate hikes by the Reserve Bank in 2022 and 2023, marking the most aggressive monetary policy tightening since 1989.
The consumer price index of 3.6 percent in the year to March was an improvement on December’s level of 4.1 percent, but underlying measures, which exclude large price changes, were above 4 percent.
Inflation remains above the RBA’s target of 2 to 3 percent and financial markets are pricing in further rate hikes, despite the Reserve Bank’s interest rate being at a 12-year high of 4.35 percent.
Commonwealth Bank economics chief Gareth Aird hinted this week at a possible rate hike in 2024, as Australia’s largest home lender changed its forecasts to have just one rate cut this year instead of three.
Dr. Low said workers’ unions had demanded wage increases to combat rising costs of living, which would likely lead to white-collar workers also demanding similar increases.
“If there is no increase in productivity, any additional increase in wages will simply serve to increase the price of goods and services, which is inflation,” he said.
Despite interest rate increases, inflation remains above the RBA’s target range of 2-3 percent
Dr. Low said a self-induced short, sharp recession could prevent what’s known as “stagflation” – or high inflation and high unemployment at the same time.
He said stagflation would cause a prolonged recession, a repeat of what happened 40 years ago.
Australia’s unemployment rate is now only 3.8 percent, but in 1982 and 1983 there was a year-long recession that pushed both the unemployment rate and inflation into double figures.
But Dr Low said Australia could rely on exports of iron ore, coal and education to deal with global tensions in the Middle East and China’s assertiveness. The addition of renewable energy can also provide a path to prosperity.
Dr. Chalmers says the tax break, which comes into effect on July 1, would be the centerpiece of the budget, with an election within a year.
“And if we can afford to do a little more, those decisions will be made within the next week or two,” he told reporters in Canberra on Monday.
The Treasurer acknowledged the pain Australians were feeling, but said any additional living costs should “eliminate inflation rather than increase it”.
Dr. Low said a short, sharp recession could prevent “stagflation,” which could push the country into a years-long recession.
Inflation remains above the RBA’s target of 2 to 3 percent and financial markets are pricing in further rate hikes, despite the Reserve Bank’s cash rate at a 12-year high of 4.35 percent.
Dr. Chalmers said inflation remains the focus in the short term and is one of the reasons his government is still targeting a surplus in 2023/2024.
But asked whether deficits over the next two financial years, as forecast in the mid-year budget update, were appropriate in a high inflation environment, he said the balance of risks was shifting.
“And our budget strategy will change a little bit with that,” Dr. Chalmers said.
Ahead of the May 14 budget, the Treasurer met with G20 counterparts in Washington and said global uncertainty had prompted the Treasury Department to revise growth expectations for major economies.
According to forecasts from the Ministry of Finance, Chinese growth in 2025 has been reduced by 0.25 percentage points to 4.25 percent.
The downgrade would mean that Chinese growth would be the weakest period since the Asian country opened its economy in the late 1970s.
The forecast for the British economy has also been adjusted downwards by 0.5 percentage points to 1.25 percent in 2025, prompted by pressure on the cost of living and a decline in exports after Brexit.
In Japan, growth has been revised up to just 0.75 percent in 2024, a decline of 0.25 percentage points after weaker-than-expected consumption.
It is unclear whether these revised forecasts will have any impact on the domestic context, with the Treasurer indicating that Australia’s updated forecasts will be included in the Budget.