How Australia could perform another economic miracle and avoid a recession

If the experience of the past two decades is any guide, Australia could avoid a recession, even at a time of global economic uncertainty.

And the extent of interest rate hikes in 2022 and 2023 could determine whether the Australian economy continues to grow uninterrupted, even as borrowers experience its most severe rate of increase in nearly three decades.

The 2020 Covid lockdowns marked Australia’s first recession since 1991.

But in between, Australia avoided a technical recession twice, even as the US did — with the downturn defined as two or more consecutive quarters of gross domestic product contraction.

That meant that the Australian economy continued to grow, with only one negative quarter in 2008, even as the United States went into recession during the global financial crisis from 2007 to 2009.

Australia also avoided a recession in 2001 when the bursting of the dotcom technology bubble plunged the US into recession just four years after Australia weathered the 1997 Asian financial crisis.

This pattern is widely expected to repeat itself in 2022 and 2023, even if the US, the world’s largest economy, most likely slips back into recession.

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That’s because the United States has a bigger inflation problem than Australia, despite borrowers getting even stronger rate hikes.

While the Reserve Bank of Australia has raised interest rates five times since May – from a record low of 0.1 percent to a seven-year high of 2.35 percent, the US Federal Reserve has been even more aggressive.

The Paris-based OECD expects Australian spot interest rates to rise to an 11-year high of 3.6 percent by 2023, with borrowers already endured four larger rate hikes of 0.5 percentage points since June.

But it expects the US Fed to continue raising its target rate from its current 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, US borrowers have faced three mega rate hikes of 0.75 percentage point.

US Fed Chairman Jerome Powell admitted last week that aggressive rate hikes in the US could lead to a recession.

“Nobody knows if this process will lead to a recession and if so, how big that recession will be,” he said.

“We need to get inflation behind us. I wish there was a painless way to do that.

“There isn’t.”

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’d like to avoid that, as borrowers are already dealing with the worst increases since 1994.

“My verdict and the verdict of most of my colleagues is that that would be incredibly debilitating for the economy and plunge us into a sharp recession,” he said.

dr. Lowe nevertheless noted that inflation had to be brought back within the Reserve Bank’s target of two to three percent, otherwise “we’ll have higher interest rates and a recession, which is damaging.”

Australian inflation rose 6.1 percent in the year to June and the RBA and Treasury expect it to reach a 32-year high of 7.75 percent by the end of 2022.

However, the US saw its equivalent headline inflation — also known as the consumer price index — hit a 41-year high of 9.1 percent in June.

US inflation, released monthly rather than quarterly like Australia, has since declined to 8.3 percent with stronger interest rate hikes and the prospect of a recession.

When Australia last went through recessions – in 1991 and 2020 – the economy shrank year on year, as the two quarters of contraction during those technical recessions outweighed the previous quarters in which GDP grew.

The Commonwealth Bank, Australia’s largest mortgage lender, expects Australia’s annual economic growth rate to halve to 1.4 percent by 2023, from 3.6 percent in June this year.

Ryan Felsman, a senior economist at CommSec, a CBA’s online brokerage subsidiary, said Australia would avoid a recession simply because the RBA would be more cautious about raising interest rates than the US Fed.

“Certainly the base case is not for a recession here in Australia,” he told the Daily Mail Australia.

“The risk of a global recession is increasing as central banks raise interest rates in a coordinated and synchronized manner.”

But the Commonwealth Bank and CommSec expect the RBA to stop raising interest rates in November once they hit 2.85 percent, simply because house prices in Australia are much higher as a percentage of income.

“May go up another 25 basis points, but not much more than three percent, when we think the US is likely to see interest rates well above four percent,” he said.

“The simple reason is that Australian households are more sensitive to interest rate hikes given borrowers’ indebtedness and we don’t think the Australian Reserve Bank will be as aggressive as their US counterparts.”

Treasurer Jim Chalmers has no control over the independent RBA’s interest rate decisions, but this week was convinced that Australia would avoid a recession even if the US and the eurozone plunged into recession.

“First of all, I think we need to recognize that the global situation is deteriorating and the challenges in the global economy in the US, UK, China, Europe and elsewhere, those challenges are increasing rather than disappearing and we will not be completely immune to that,” he said. he to ABC Radio National.

“Our expectation is that the Australian economy will continue to grow, but so are the challenges facing the Australian economy.”

Despite a string of rate hikes since May, consumers continue to spend, with retail sales rising 0.6 percent in August — the eighth monthly rise in a row.

Cafes and restaurants saw trade increase by 1.3 percent last month, data from the Australian Bureau of Statistics shows.

Australian consumers are now spending a lot of money after building up their savings buffers during the 2020 and 2021 lockdowns.

Westpac senior economist Matthew Hassan said retail sales figures show recent interest rate hikes have not slowed consumer spending so far.

“Interest rate hikes still seem to have little effect,” he said.

With spending cuts and an unemployment rate of just 3.5 percent last month, Australia could avoid a recession even at a time of global uncertainty and a major slowdown in China – Australia’s largest trading partner.

There are risks.

A stronger US dollar – due to higher US interest rates and reduced global equity buying risk appetite – is making 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 cents, is making our exports cheaper, meaning there is economic activity that makes a recession less likely.