The Australian economy is at heightened risk of plunging into a recession following unexpected moves by the Reserve Bank of Australia (RBA) to address rampant inflation, thereby signaling a shift from their long-standing commitment to maintain low unemployment.
The pivot in approach was announced by RBA Governor, Philip Lowe, who surprised markets with a rate hike to 4.10%. This move, along with a warning of potential further rate increases, has sparked a shift in economic projections. Previously, economists had anticipated rates peaking at 3.6% when the RBA paused its tightening cycle in April.
The RBA’s stern focus on curbing inflation, superseding job preservation efforts, has resulted in economists factoring in the likelihood of another rate increase and the consequential increased risk of a recession. If realized, this would mark Australia’s first significant economic contraction in more than three decades, excluding the temporary downturn caused by the COVID-19 pandemic in 2020.
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Paul Bloxham, HSBC’s chief economist for Australia, New Zealand, and Global Commodities, predicts that Australia’s economy will likely falter due to these rate hikes, causing the nation to teeter on the brink of a recession. Moreover, Commonwealth Bank of Australia estimates a 50% chance of a recession in 2023.
The Australian economy’s growth is already slowing down, evidenced by the marginal 0.2% growth in the March quarter. Households, wrestling with financial difficulties, are depleting savings and reducing spending, further dampening economic activity.
With the full impact of the RBA’s drastic tightening of monetary policy still pending, bond markets have begun pricing in the rising recession risks. The inversion of the bond yield curve, often interpreted as a harbinger of a recession, further amplifies these concerns.
While RBA’s recent policy shift aims to reel in inflation, it also challenges the job market’s stability. Lowe initially expressed a willingness to wait until mid-2025 to restore inflation to the target range, preserving job gains. However, his recent statements suggest this patience is wearing thin.
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Jonathan Kearns, chief economist at investment firm Challenger and a former RBA executive, concurs that holding onto job gains could solidify inflation expectations and maintain high actual inflation rates. This might lead to an increase in wage demands, further fueling inflationary pressures.
While Australia’s monetary authorities are resolved to tame inflation, their course correction might result in a turbulent economic ride. This risk is a price they seem prepared to pay, noted Ivan Colhoun, chief economist of markets for National Australia Bank.
News Source: MalayMail
