Recession risk in Australia now sits at a 50/50 outcome
This month’s rise in the cash rate to 4.1% is now being fully felt, with household disposable income falling at its fastest pace in 40 years.
While households still retain a small buffer of unspent pandemic benefits, there have been massive increases in mortgage servicing costs. Many are yet to experience this, with the bulk of the fixed-rate loans taken out over the pandemic converting to higher rates over the next twelve months.
Renters are also being squeezed in a tight property market, with rents jumping on average 10% over the last year.
Households are now grappling with the squeeze on their cashflows – primarily caused over the past year by inflation. The cost of everyday goods and services have been rising at levels not seen for over thirty years. Inflation has now jumped to the services sector, with many households looking at increases in their insurance premiums of around 20%.
This will weaken consumer spending throughout the second half of 2023 and early 2024. The RBA reiterated at the time of the June rate rise that further increases in the cash rate are likely. Many analysts now expect two more rate rises, bringing the cash rate to a peak of 4.6%.
The risk is that the RBA may overstep interest rate settings, resulting in household cashflows being substantially impacted.
Wages are picking up
Growth in wages over the same period failed to compensate households. But this is now changing with the tight labour market forcing wage rises across the economy. Earlier this month, the Fair Work Commission increased award rates by 5.75% and the minimum wage rate by 8.6%.
There are some shining lights in the economy
One is the employment market, with the May Labour Force Survey highlighting a very strong increase of 76,000 jobs for the month and the unemployment rate falling to 3.6%.
The other is business investment. High levels of spending and investment in infrastructure, renewables and mining are expected to see growth in business investment of 4.7% in 2023. (Usually when an economy gets close to a recessionary environment, business investment falls).
Other positive contributors are the high level of population growth; stability in the housing market, with prices now bouncing back from the cycle lows; and upside to wages growth over the next year, as labour markets remain tighter for longer.
New Zealand is our canary in the gold mine
New Zealand recently entered a technical recession, with GDP falling 0.1% in the March quarter after falling 0.7% in the December quarter.
If New Zealand can return to growth, as many analysts predict, and business investment in Australia remains elevated, we may avoid a New Zealand scenario here.
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