IS THE AUSTRALIAN ECONOMY RECESSION BOUND IN 2023?

RBA Continues Rate Hikes

As the world continues to grapple with the economic fallout from the COVID-19 pandemic, the Reserve Bank of Australia (RBA) has taken drastic measures to stimulate the Australian economy.  While the country experienced a rebound in the latter half of 2020, some experts are now questioning whether the RBA’s recent rate hikes are actually pushing Australia toward recession. In recent years, the RBA has employed a number of tactics to boost the economy and bring inflation back to target, primarily by continually increasing interest rates. As on 7th March 2023, the RBA Board decided to increase the cash rate target by 25 basis points to 3.60 per cent.

According to leading economists, homebuyers should brace themselves for four more potential interest rate increases by August. Deutsche Bank Australia’s senior economist, Phil O’Donaghoe, predicts that the Reserve Bank of Australia may raise the official cash rate from 3.1% to 4.1% within the next seven months. If this prediction holds true, it could result in an additional $300 added to the monthly repayments of a $500,000 mortgage. 

2022 – 2023 RBA Rate Increases

What is a recession?

The Reserve Bank of Australia (RBA) defines a recession as a prolonged period of weak or negative growth in real Gross Domestic Product (GDP), accompanied by a significant increase in unemployment rates. Although there is no single definition of recession, the generally accepted rule of thumb is two consecutive quarters of negative GDP growth. According to Forbes, the United States entered a recession in the summer of 2022 based on this definition.

Another key economic indicator that has accurately predicted a recession for the past 56 years is the Treasury bond yield curve. This curve indicates the price difference between the 10-year bond rate and the three-month bond rate. According to writer Sean Williams of The Motley Fool, the New York Fed’s recession-forecasting tool has not been wrong when the probability of a recession surpasses 40%. In December 2022, this tool hit a high reading of 47.31%, indicating that global economic activity is undoubtedly expected to slow in 2023.

Could 2023 be the year that Australia experiences a recession?

There are concerns among economists that the Reserve Bank of Australia’s (RBA) plan to continue raising interest rates could push the country headfirst into a recession. This comes after a period of strong economic growth, with low-interest rates and government stimulus measures providing support to businesses and households during the pandemic. For over 28 years, Australia was able to avoid a recession, even during the Global Financial Crisis of 2007-2008. This marked the longest period of economic growth without a recession for a developed country since the establishment of the System of National Accounts in 1953.

Analysts argue that the RBA’s policies to combat inflation by hiking rates have gone too far, and that they are creating a “debt trap” for Australian consumers. According to a recent report by Rate City, the average Australian household now owes more than $500,000 in debt. Despite the tightening financial hold on Australian homeowners, the RBA is dedicated to stabilizing inflation through increasing interest rates. According to RBA Governor Phillip Lowe, “The Board anticipates that additional interest rate hikes will be necessary in the upcoming months to ensure that inflation returns to its target and that this period of elevated inflation is only transitory.”

The problem with this, experts argue, is that it leaves Australian households vulnerable to an economic downturn. If interest rates were to rise or property prices were to fall, many households would struggle to keep up with their mortgage payments, potentially leading to defaults and foreclosures. This, in turn, could have a ripple effect on the broader economy, potentially leading to a recession. Furthermore, the RBA has set a target of keeping inflation between 2% and 3% per year, but in recent months inflation has surged above this range. This has led some experts to question whether the RBA’s policies are actually exacerbating the problem by encouraging excessive borrowing and spending.

2023 AUSTRALIAN ECONOMY Recession – Expert Forecasts

According to Cameron McLean, a financial planner at Acumen Wealth Management who spoke to 9news.com.au, the series of successive interest rate hikes raises the possibility of Australia plunging into a recession. “The probability of a recession has risen, and it is unquestionably making it more challenging for households,” he stated. 

Echoing similar sentiment, Former Liberal leader John Hewson, in his first opinion article for The Saturday Paper this year, proposed that the combination of a poorly executed COVID-19 plan and rising interest rates, in the context of a fragile budget, “could be sufficient to make a recession unavoidable.”

On the other side of the coin, Anneke Thompson, the chief economist at CreditorWatch, argues that Australia is unlikely to fall into a recession, despite expectations of a significant slowdown in GDP growth, thanks to the safeguard of robust employment throughout the country. However, 

Both expert opinion and hard data point to the fact that Australia, like many other countries, appears to be heading towards a period of sluggish growth. While the question of whether a recession looms remains uncertain, the more crucial issue is how severely will the downturn impact consumer confidence, household debt, and the overall economy, and as well as how long these effects will last.

How To Prepare For A Recession 

A recession will undoubtedly have negative impacts on everyday Australians. If the Reserve Bank of Australia keeps interest rates high for an extended period of time and the country enters a recession, there will more than likely be an increase in mortgage delinquencies and defaults, significantly lower demand for rental housing and corporations will reduce spending and cut jobs, destroying the high employment rate cushion Australia has against soaring inflation and rate hikes. In order to prepare for and weather a potential recession, it’s important to proactively manage your finances. Here are five steps you can take to recession-proof your household:

1. Evaluate your budget – Knowing where your money is going each month can provide important context for your spending habits and help you make necessary adjustments.
2. Pay off debts – Reducing your principal balance can lower your interest charges over time and provide financial relief.
3. Build an emergency fund – Prepare for unexpected expenses such as medical bills, home repairs, or job loss by setting aside a portion of your income each pay period.
4. Consult your mortgage lender – With home loan rates rising, it’s important to reach out to your lender or a mortgage broker to discuss potential options for assistance with mortgage stress.
5. Seek financial counseling – The National Debt Helpline provides free resources and counseling to help manage debt and improve financial well-being.

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