Is Australia facing a fear of recession in 2022?

Highlights

• As supply-side pressures are prompting a rise in the prices of goods and services, fears surrounding recession have surfaced again in the global economy.
• A technical recession is defined as the period where economic growth runs negative for two consecutive months.
• US Treasury yield curves have inverted, raising alarm bells for investors and economists alike.

As the widely feared phenomenon of a global recession resurfaces in 2022, experts are revising their expectations for the economic outlook. Much like 2020, circumstances have been extremely volatile this year, with the big “r-term” dominating the discussions surrounding the economy.

Most nations simultaneously ran into a recession soon after nationwide lockdowns were announced during the first wave. In theoretical terms, recession refers to a temporary period of economic slowdown, marked by reduced business activity and a fall in GDP. Declining consumer confidence and physical restrictions were behind the recession of 2020, which forced some businesses to conduct activities remotely, and even led to the closure of certain businesses.

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However, the situation is infinitely more complex this time around due to a barrage of factors affecting global supply chains. For Australia, geological hindrances have also contributed to slower business activity. Positively, the country has fared well despite all oddities.

With a relatively strong run throughout 2022, Australia could be looking at increased friction against its economic growth. But will this catapult into a recession?

What happens during a recession?

Speaking strictly in technical terms, the Reserve Bank of Australia (RBA) defines a recession as the period when the rate of growth of real GDP is negative for two consecutive quarters. However, an all-encompassing definition of recession also includes a drop in employment alongside weaker GDP growth. Job losses and weaker business activity are typical factors associated with a recession. Inflation is also linked with recessionary spells.

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Most nations are on the brink of tipping from the high economic growth levels seen last year. The uncertainty in economic outlook has arrived majorly after the Russia-Ukraine war escalated. When the Russian President Vladimir Putin initially tiptoed around the idea of invading Ukraine, only a handful of people expected him to go ahead with the devastating move.

What has resulted from this invasion can be simply described as a catastrophe for existing supply chains. Worsening political relations with Russia are the least of the world’s problems, as trade routes from Ukraine have been hampered, and international fuel prices have skyrocketed. Rising energy prices have impacted individuals at the root level while translating into increased retail prices.

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Is there any chance of a recession in 2022?

It is tremendously difficult to predict a recession, with no available model to allow the same. However, a lot depends on the market sentiment resulting from prevailing developments. Some experts suggest that the US could face a recession in 2022, even if the global economy fares well.

Most of these fears have been locked around the interest rate decision by the US Fed. As per some experts, delayed interest rate hike by the Fed has opened doors to the possibility of a recession setting in. The US Federal Reserve announced a quarter percentage point rate hike in March this year. This marked the first increase since December 2018.

In addition to this, an inversion of the curve plotting yields on short and long-term US Treasury bonds has rung warning bells across markets. An inversion of the yield curve indicates that investors are becoming pessimistic about the economy’s near-term prospects. The inversion is obtained when investors start choosing less risky bonds to secure themselves from losses. The US Treasury bonds act as an important threshold for other government bonds and help gauge the strength of the economy.

What about Australia?

Australia’s monetary policy measures have been mostly similar to the US, as there has been an unusual delay in increasing interest rates. But unlike the US Fed, the RBA has still not raised its interest rates. This has fuelled speculations of a hard landing once RBA raises rates. However, Australia has been on the relatively safer side of things, with inflation remaining subdued in the country compared to many other nations.

RBA Governor Philip Lowe stated that inflation in Australia has increased, but it remains lower than in several other countries. Perhaps this fact alone highlights the country’s resilience against all adversities and could prevent a recessionary spell. However, the real impact would only be known once the RBA raises rates, which is expected to happen by June.

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