Recession Australia: Will Australia go into recession in 2023?
It’s the question on the lips of economists, analysts, actuaries, executives, journalists and, most importantly, everyday Australians: Will we experience a recession in 2023? Of course, the answer is complicated.
Before we can determine whether or not a country will enter into recession, it’s important to understand the definition of the term. However, it seems that even the interpretation of the terminology is in dispute.
What is a recession?
The Reserve Bank of Australia (RBA) asserts that, while there is no single definition of recession, it can be perceived as a sustained period of weak or negative growth in real Gross Domestic Product (GDP) accompanied by a significant rise in the unemployment rate.
A commonly accepted rule of thumb for characterising a recession is two consecutive quarters of negative GDP growth. By this definition, the United States entered a recession in the summer of 2022, according to Forbes.
However, the National Bureau of Economic Research (NBER) - an organisation that delineates U.S. business cycles - refutes this claim, stating that they “do not identify economic activity solely with real GDP, but consider a range of indicators”, including Gross Domestic Income (GDI) and monthly statistics.
While the question of whether or not the U.S. is in recession right now may be up for debate, one economic indicator hasn’t been wrong in 56 years - the Treasury bond yield curve, which denotes the price difference between the 10-year bond rate and the three-month bond rate.
“With the exception of a peak probability of a recession of 41.14% in October 1966, the New York Fed's recession-forecasting tool hasn't been wrong if it's surpassed 40%,” according to writer Sean Williams of The Motley Fool.
“In other words, if the New York Fed's recession probability indicator surpasses 40%, we've had a recession within 12 months, without fail, for more than a half-century. In December 2022, this recession probability tool hit 47.31%. That's the highest reading since 1981, and a very clear indication that economic activity is expected to slow at some point in 2023.”
So, will Australia experience a recession?
Australia managed to avoid recession for more than 28 years, including through the Global Financial Crisis of 2007-2008. This represented the longest period of growth without a recession for a developed country since the System of National Accounts was established in 1953.
Then, the global COVID-19 pandemic hit. The Australian economy entered a recession after GDP fell 0.3 per cent in Q1 2020 and a whopping 7 per cent in Q2 2020 - the steepest contraction in recorded history.
Prior to this, the last time Australia endured a recession was 1990-1991. During this period, GDP fell by 1.7 per cent, employment sank 3.4 per cent and the unemployment rate rose to 10.8 per cent.
For cultural context, we began sending troops to assist the United Nations in the Gulf War; Professor Fred Hollows was named Australian of the Year (1991) for his work in ophthalmology; and MC Hammer (“U Can’t Touch This” in 1990), Sinéad O'Connor (“Nothing Compares 2 U” in 1990) and Darryl Braithwaite (“The Horses” in 1991) all topped the Australian Recording Industry Association (ARIA) charts.
Dwindling GDP growth and mounting inflationary pressures
The latest Australian Bureau of Statistics (ABS) national accounts estimates revealed that the economy expanded 0.6% quarter-on-quarter in Q3 of 2022, compared with market forecasts of 0.7%, following a rise of 0.9% in Q2. Although this represents the fourth straight quarter of economic growth, it was also the softest rise in the sequence.
Inflation remains persistently sticky on the back of corporate profits, stubborn house prices and high rents, potentially paving the way for the RBA to deliver a fresh round of interest rate rises in the months ahead.
In 1964 The Beatles confessed that money can’t buy me love. In 2023, if prices keep rising, it won’t buy anyone much at all. Inflation in Australia is the highest it’s been in more than three decades, yet interest rates keep rising. So, when can we expect monetary policy to stifle ballooning costs and return purchasing power to the people?
While these weakening economic prospects may lead to a recession in 2023, it’s unlikely that Australia will be subjected to the even more troubling concept of stagflation, which last transpired globally in the 1970s.
Recession forecasts, warnings and rebuttals
Predicting the next recession is a tough business. Calculations and estimations are reported, refined, reexamined, reworded, retracted, recast and sometimes regretted. And, in many cases, they’re just simply wrong.
Perhaps the most sensible solution is to analyse a range of economic outlooks from a variety of different domestic and international sources to gauge the overall sentiment and paint a picture of the forthcoming fiscal landscape.
This week, Queensland Investment Corp’s chief economist Matthew Peter told the AFR that Aussie households will be able to draw on their savings buffer to support consumer spending and avoid recession in the first half of the year.
Similarly, CreditorWatch chief economist Anneke Thompson advocates that although GDP growth is expected to slow dramatically, “it is still unlikely at this stage that Australia will move into recession” due to the safety net of strong employment, MPA (Mortgage Professional Australia) Magazine reported.
However, in his first opinion piece for The Saturday Paper this year former Liberal leader John Hewson suggested that, in the context of a weakened budget, the combination of a mismanaged COVID-19 strategy and interest rate increases “may be enough to make a recession inevitable”.
Deloitte Access Economics partner and lead author of the latest Business Outlook report, Stephen Smith, advises that Australia’s consumer-led recovery is quickly evaporating, forecasting economic growth of just 1.7 per cent in 2023, down from 3.6 per cent in 2022. He warned that if there were any further increases to the cash rate, this could “unnecessarily tip Australia into recession in 2023”.
MYOB’s latest Business Monitor for 2023 found that more than half (52 per cent) of small and medium (SME) Australian businesses fear a recession in the year ahead, owing to reduced consumer spending triggered by rising interest rates and falling real wages.
In November 2022, German investment firm Deutsche Bank declared that while Australia may avoid the technical definition of a recession, a forecast spike in unemployment by the end of 2023 (+1 per cent to 4.5 per cent) means that it will meet its interpretation.
At the beginning of the last financial quarter, the World Bank cautioned central banks against simultaneous interest rate hikes that may be edging the collective economy toward a global recession in 2023.
A recession down under or not?
As mentioned above, substantiating whether or not Australia will experience a recession will come down to a number of factors, including the way in which the term is defined.
If GDP exhibits two consecutive quarters of negative growth, many experts will consider this a recession. However, for other commentators, a more prolonged period of stagnant growth - paired with a jump in unemployment - may need to occur before they declare a recession.
Australia, like most of the rest of the world, seems destined to encounter some form of economic hardship and a spell of weak growth. What may be the more important question isn't whether Australia will enter into a recession but to what extent will this forecast slump affect consumer confidence and household debt, and for how long? Will the effects be mild and tolerable or harsh and drawn-out?
How to prepare for and withstand a recession
Given that a number of economic experts speculate that Australia could enter a mild recession by the end of 2023, it’s worth getting your finances in check ahead of time to prevent any major complications and ride out the storm.
There are at least five steps you can take to optimistically recession-proof your household:
- Assess your budget - Understanding where your money is going each month will provide much-needed perspective and context to your spending habits and allow you to better adjust them accordingly.
- Pay down debts - You’ll not only reduce the principal amount owing, but also the total amount you’ll pay in interest charges over time.
- Create an emergency fund - Ease the sting of unexpected expenses such as medical bills, urgent home repairs or loss of income by putting aside a small amount each pay cycle.
- Speak to your mortgage lender - Home loan rates are on the rise and mortgage stress is a real headache. Consult your lender or a mortgage broker to see if there is anything they can do to assist.
- Reach out for help - The National Debt Helpline offers free financial counselling.
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