Australia has overcome its fair share of economic slowdown in the past without going into recession, but will it be able to do a miracle again?
As concerns about possible recessions in the eurozone, the UK and the US continue to grow, the possibility of the first truly global economic slowdown since the GFC, excluding the impact of the pandemic, is seen in the horizon.
On the world stage, the US is a major engine for global economic growth. But we have already seen first quarter data there that showed negative growth.
Now, the U.S. Federal Reserve’s Atlanta branch is forecasting 0% growth for the second quarter, with the slightest surprise it could send America into a technical recession.
In much of the developed world it is a similar story: growth is slowing significantly, rising inflation is affecting households, and the recession is posed as a very real possibility on the horizon.
However, in our generally quiet little corner of the South Pacific, Australia is better than most of its counterparts in the developed world.
But how is the Australian economy prepared for a recession?
The budget deficit
This is a scenario a little good news, bad news.
First, the good news: the budget deficit for the period 2022-2023 is expected to stand at 3.4% of GDP, significantly lower than the estimates of 4.4% of GDP contained in the economic outlook for mid-year last year.
The bad news is that the budget deficit for the period 2022-2023 is expected to stand at 3.4 percent. Excluding the impact of the pandemic and the years defined by the stimulus after the global financial crisis, this is the largest deficit since the early 1990s.
Despite improved budget estimates, the deficit as a percentage of GDP remains at about the same level as during the peak of the government’s response to the global financial crisis.
The extent to which this could affect the government’s response to a recession depends entirely on Prime Minister Anthony Albanese and Treasurer Jim Chalmers. But looking at the situation through the lens of historical norms, there is less room for a large spending stimulus program without the deficit reaching near-record highs in peacetime.
Unemployment
Of all the categories shown today, this is by far the most positive. Through a combination of government stimulus measures, reversing levels of net migration abroad and strong domestic demand, Australia currently has the lowest unemployment rate in 48 years, at just 3.9 per cent.
The latest employment figures have also been encouraging. In May, the economy created more than 60,000 full-time jobs and the underemployment rate (employed people who want more hours) fell to 5.7%, compared with 8.6% before ‘outbreak of the pandemic.
The labor market is currently a pillar of strength for the country’s economy, with several employment rates pointing to strong continued demand for labor in the immediate future.
Home trust
According to the ANZ-Roy Morgan Consumer Confidence Index, the outlook for households is only slightly higher than it was during the recession of the 1990s, excluding the initial shock of the pandemic.
While other indices paint a less damaging picture of household confidence levels, overall confidence remains weak, which is remarkable and worrisome to the same extent.
Despite unemployment in the 48-year lows and GDP growth that has advanced at a strong rate of 3.3% over the past 12 months, households remain very concerned about their future prospects and the increase of the cost of living here and now.
This is an unenviable place to maintain confidence levels should a recession hit our shores while households remain so depressed with respect to the economy in the coming months and years.
Interest rates
After raising interest rates for the first time in 11 years from May, RBA’s cash interest rate now stands at 0.85 percent. Although it is higher than where it was immediately before the outbreak of the pandemic, the cash rate remains close to historic lows.
When the global financial crisis hit the coasts of Australia in 2008, the RBA was able to reduce the cash rate from 7.25% to 3%, giving a big boost to household coffers. mortgage holders.
As things stand today, the RBA’s reach for increasing household consumption is limited, with only 0.85 percent of possible rate cuts being offered before it reaches zero.
But that will change again in the coming months and years.
As of Thursday, interest rate futures markets had a cash price of 3.32% in December and a maximum rate of 4.05% in August next year.
This would provide the RBA with a rival amount of GFC-era ammunition with which to potentially increase family spending.
Report card
While there are many other factors that influence a nation’s readiness for a possible recession, in these four categories Australia gets a mixed score.
The strength of the labor market is historic and if job postings are an accurate barometer of labor demand, it may remain strong for longer than many expect, even in the face of rapidly rising job rates. interest.
On the other hand, household confidence and a large budget deficit are both weaknesses with which we would not want to go into recession if it could be avoided.
Looking to the future, we are largely in unexplored waters. Inflation is expected to continue to rise over the coming months, many of the world’s leading stock indices are in bearish markets and geopolitical instability is possibly at its highest level since the collapse of the Soviet Union.
Whether Australia will follow the United States and others into the recession if this scenario occurs is still an open question.
Lucky Country has dodged recessions before. It may be possible again.
Tarric Brooker is a freelance journalist and social commentator. | @AvidCommentator