Is Australia Going Into a Recession and What Does It Mean If We Do?

recession australia 2022

For anyone who lived through the 2008 global financial crash, the idea of a recession is pretty terrifying.

A recession typically means a lot of people lose their jobs, wages stagnate, business slows to a halt and, at the worst end, the economy all but collapses.

Is this the direction that Australia is headed in? Well, the alarm bells for a looming recession have been sounding since last year and, so far, it looks like Australia has managed to just about avoid one.

However, we’re not out of the woods just yet, and the next few months and years could see us head into recession territory.

What Is a Recession?

In simple terms, a recession means the economy isn’t working. But, there can be a range of reasons for why and each of those then defines how bad the recession will get.

Technically, in Australia, we measure a recession as two consecutive quarters of economic contraction in gross domestic product. That means at least half a year where the economy didn’t grow and in fact went backwards.

Obviously, that means having to wait six months to find out if the economy is in recession or not, which isn’t very useful if you’re trying to set a policy to fix one.

And while GDP is one measure of the economy, it’s quite an abstract take that doesn’t give the whole economic picture. Other measures of recession include rising unemployment, often factored in together with falling economic value, alongside falling value in some sectors of the economy but not others.

A six-month period of slight but declining economic growth is considered a ‘mild’ recession. It’s when you see deep cuts in GDP, month on month, for a long time, that worst-case scenarios start to play out.

From the looks of things, this isn’t where we’re headed.

What Causes a Recession?

Recessions are caused by some fault in the economy, but each recession is different.

In the 2007 global financial crisis, banks were over-invested in housing stock that they thought was rock solid. It wasn’t and, when this was discovered, they lost a tonne of money, sending shockwaves through the economy.

The current situation is very different. After COVID, in which governments spent a lot of money while work was halted, and the knock-on effects on imports, construction, and population, the economy is still settling down from the turbulence.

Since things now cost more to create, partially owing to high import costs, inflation has been rising. Post-COVID, Aussies are also spending more on holidays, travel, and other leisure activities.

Inflation is kind of the opposite end of the spectrum of recession. The economy goes into overdrive, the value of the dollar declines, and, eventually, people can’t afford to eat.

In a bid to combat inflation, the Reserve Bank of Australia has been raising interest rates over the past year or so — you may have heard about this — from 0.1% to 4.15%, sending mortgages skyrocketing and sucking up all the spare cash people might have had to spend on other things, thereby bringing inflation down. It’s a blunt instrument, but it’s the only one they’ve got.

Unfortunately, this tactic comes with the risk of tipping the economy into recession as people and businesses pull back on spending.

As Bloomberg wrote in their recession analysis, “When central bankers try this hard to slow the economy down, they often end up tipping it into outright reverse”.

This is the line we’re trying to tread right now, with RBA Governor Phillip Lowe using the phrase “a narrow path” in relation to the economy fairly consistently over the past few months.

If there is going to be a recession, it’ll be caused by the RBA. Although, if they had done nothing, the cost of living could be even more crippling for a lot longer.

What’s the Likelihood of a Recession?

Well, depending on how you count, we’re already in one.

Last week, the Australian Bureau of Statistics revealed that in the March quarter, the economy grew by just 0.2%, the weakest growth Australia has seen since the 2021 Delta lockdowns.

If you look into that further, the figures also show that retail spending fell by 0.6% in the March quarter, following a 0.3% decline in December. This means, technically, we’re in a consumer recession as people cut back on purchases to accommodate the rate hikes.

“Outside of the COVID-19 pandemic period, this is the largest fall in retail sales volumes since the September quarter 2009,” the ABS Head of Retail Statistics has said.

Ominously, NAB’s Chief Economist told The Drum, “It’s here.”

A consumer recession is significant given that much of our economic growth comes from retail spending. The knock-on effect for retail businesses could see them having to cut staff. However, it’s not the all-out recession that people are concerned about.

More worrying is the fact that GDP per capita also fell by 0.2%. If the next round of figures shows the same, that means we’re currently in a ‘per capita’ recession. We just haven’t been given official confirmation as of yet.

Those ABS figures prompted HSBC and CommBank to predict that a recession was 50% likely this year, with growth slowing to between 0.1% and 0.7% over the next year. They also expect that joblessness, currently at 3.5%, would climb to 4.7% over the next 12 months.

Bloomberg’s predictions, sourced from 14 economists, put the probability of Australia entering a recession at 40%, which then lowered to 35% as the RBA held off interest rate hikes in April. It has now climbed back to 38%, following the latest rise.

However, the RBA’s own assessment, revealed through a freedom of information request, puts the likelihood of a recession much higher.

“Estimates suggest the probability of a recession over the next two years could be as high as 80%,” modelling from an RBA Senior Economist in September last year read.

“If a recession does occur, it is most likely sometime over the next four quarters. This is in line with intensifying market commentary predicting a recession in the first half of 2023.”

What Will Happen if Australia Goes Into Recession?

As above, it’s not a major economic fault that has broken the economy, resulting in years of pain. But that doesn’t mean it’s going to be easy.

As HSBC’s Chief Economist, Paul Bloxham, has said, the severity of the recession depends on how far the RBA has crippled the economy, making us unable to spend our way out.

“A lot of it will be how much this monetary tightening really does feed through, and how much it really does crimp the consumer,” he told ABC News.

“Primarily what we’re describing is a slow down in growth that’s driven by a slow down in the consumer.”

What’s hard to predict is how that then feeds on to the rest of the economy, dragging down businesses and industries that rely heavily on consumer spending.

He also points to the fact that immigration is now rising after the pandemic, increasing the number of people counted in GDP per capita, driving it downwards, but bolstering spending in other areas. Australia may be able to avoid a recession simply by bringing more people here to spend their cash.

Critics have rounded on the RBA, claiming that the last two rate hikes are necessary given that inflation has already peaked and people are really struggling. The RBA predicts that inflation will get back to its target of 2-3% by mid-2025, while others suggest it could come down a lot faster, making their actions totally unnecessary.

This is probably not helped by Lowe’s comments that people should just take up a side hustle, rent out a room, or make “smarter” housing choices. This is from a man who is paid north of $1 million a year.

Still, the RBA is pretty much doing what every other central bank in the world is doing. As a result, America is teetering on the brink, the UK has gone into, and then out of, a recession, and 20 countries in the Eurozone have also crossed into the red.

What the World Bank has warned though is that, given everyone’s at it, central banks probably don’t need to go as hard as they are right now as rising rates may have a cumulative effect on the global economy.

So, is this another recession that Australia just has to have? According to the RBA, quite possibly. It may well just be a softer landing than expected.

RelatedThe Latest Inflation Figures Are in and Hoo Boy, We’re in for a Bumpy Ride

Related: RBA Smashes the Interest Rate Button for the Seventh Time

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