- Recession talks in the US have created much stir in the global economy, clouding the economic outlook.
- The US financial market is of great significance to the Australian banks, which often bear the brunt of high interest rates in the US.
- Government support, coupled with increased minimum wages and strong economic growth, has helped bring stability into the Australian economy.
With all the chatter building up about a recession hitting the US economy, consumer sentiment across major countries has taken a massive hit. Most of all, stock markets have shown the biggest and earliest impact of falling consumer and business sentiment. In the given scenario, policymakers and economists are predicting an economic slowdown across the globe.
How Could A Possible US Recession Affect Australia?
There are multiple reasons to fear a recession. Sudden economic shocks, high inflation and dwindling demand for goods and services are some of the most common reasons that cause a recession. However, the current recession fears have stemmed majorly from rising prices. At the same time, supply chain disruptions and lockdowns in China have worsened the economic scenario.
A recession is often followed by rising unemployment and slowing wage growth. In Australia, the labour market has been a source of constant strength and stability in times of distress. Thus, an economic slowdown would be a threat to the all-time low unemployment rate. At the same time, pay cuts could become more common if the economy falls into a recession.
Why are recessionary fears affecting Australia?
The US has been the focal point of discussions related to a recession. The US economy has a deep impact on the global economy, including the Australian economy. In fact, much of the world is currently facing problems similar to the US.
However, the US inflation rate has reached a worrying level as the Consumer Price Index increased 8.6% over the 12 months to May 2022 (Bureau of Labor Statistics). The annual inflation rate in the US is much higher than that in many other countries. However, this has not eliminated the threat of a recession flowing into other nations from the US.
For Australia, the linkage with the US economy comes through the financial market. Australian banks have taken borrowings from the US banks, which has increased the significance of the US interest rate for Australia. Speculations of further interest rate hikes are already rife in the US market.
These high interest rates are bound to affect Australian banks and prompt a further rise in the cash rate. Thus, tighter monetary restrictions could make living conditions even tougher for Aussies in the present inflationary environment.
What do economic indicators suggest?
After the RBA increased the interest rate by 0.50% in June 2022, the ANZ-Roy Morgan Consumer Confidence index plunged to its lowest level since early April 2020. While consumer confidence recently improved last week, helped by the state budget initiatives in New South Wales and Queensland, it has been weaker over recent months.
Even as the unemployment rate remains low, Aussies have exhibited concerns about their conditions deteriorating over the coming months. This is because most households have been bombarded with rising living costs and painful circumstances. Thus, they have cut spending on consumer goods to manage the higher living costs and increasing interest rates.
In the given scenario, the Reserve Bank of Australia (RBA) is expected to tighten its monetary policy further in the upcoming meetings. The latest interest rate hike by the RBA was higher than expected, which could become a common trend over the coming months.
In other words, larger interest rate hikes could become a shocking reality for the Australian economy in the near future. The cash rate now sits at 0.85%, and the upcoming hikes could translate into large monthly repayments for mortgage holders. As consumer confidence dips to unpalatable levels, the RBA might be forced to lower interest rates to help raise consumer demand.
In the meantime, certain factors are helping stabilise the Australian economy, including unprecedented government support, relatively low inflation, increased minimum wages and strong economic growth. The upcoming months will decide how Australia will tackle the recessionary war on the back of these positive factors. Overall, the viewpoint seems to be mixed on whether Australia could completely dodge a recession or not.