Recession risk a 'balancing act' for RBA

Could Australia enter a recession this year? (Source: Getty)

Interest rates are rising, mortgage repayments and rents are skyrocketing, energy prices are soaring and grocery bills are through the roof. So, are we heading for a recession?

On the one hand, the unemployment rate is extremely low and wages are rising (albeit slowly), but on the other hand, with prices rising like they are, how long can we keep up?

BetaShares chief economist David Bassanese told Yahoo Finance Australia’s chances of falling into recession in the coming year was really “in the RBA’s hands”.

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“Whether we have a recession really depends on whether the RBA ultimately judges we need one to bring down inflation. At this stage, I don’t think the RBA has reached that conclusion and is still prepared to be a little patient in waiting to see how quickly inflation falls of its own accord,” Bassanese said.

“Of course, it’s a balancing act in that the longer the RBA waits for inflation to fall – and the longer it stays relatively high – the greater the risk of it becoming embedded into inflation expectations and hanging around a lot longer, which would ultimately then require a harsher recession to get it down. The RBA can’t wait forever.”

Why we might avoid recession

Bassanese said wages growing slowly was actually a good thing. This is because if wages keep matching inflation, Aussies will continue to spend - ultimately driving inflation higher and perpetuating the cycle.

“I’m most heartened by the fact underlying wage growth across the country still appears relatively muted, despite low unemployment,” he said.

“Annual growth in the wage cost index is still just over 3 per cent. I’m also encouraged by the easing of global supply-chain bottlenecks and declining goods-price inflation.”

Why we might fall into recession

So yes, while wages are only growing slowly, that doesn’t help the fact that everything costs an arm and a leg.

“Service sector inflation – everything from health care, hotel rates and airfares – remains sticky. Electricity and housing rents are also rising strongly, and state governments appear to be weakening in their resolve to keep public sector wage inflation down,” Bassanese said.

“It’s not a done deal that inflation will fall quickly enough to satisfy the RBA, hence a recession remains a significant risk – potentially around 30 to 40 per cent at this stage.

“Given our highly leveraged household sector, another two to three further rate hikes would likely make a recession more likely than not.”

What is a recession and how would it impact me?

A technical recession is defined as two periods of negative growth. This basically means that if the Australian economy contracts (or GDP falls) for two consecutive quarters, we are technically in a recession.

However, how severe the recession is makes a big difference and monetary policy is one of the main tools used to fight against a long and rough recession.

Generally speaking, when a recession occurs, many people lose their jobs and households struggle to keep up financially.

For example, during the 2008 Global Financial Crisis, people who were able to enter the workforce started with much lower salaries, leading to years of lost potential income, and those looking to retire saw a major drop in their superannuation.

In Australia, millions of people lost their jobs, their homes and large amounts of their wealth.

Are we prepared for a recession?

Short answer - no. The latest research from Compare the Market revealed almost half of Australians weren't ready to go into a recession.

More than a quarter said they weren’t prepared and were barely getting by, while 14 per cent said they were not prepared at all and would face financial setbacks if a recession occurred.

Compare the Market general manager of money Stephen Zeller said the RBA’s decision to raise the cash rate for the 11th time in 12 months was a “necessary evil”.

“Even though we can see these aggressive rate increases have had some effect on inflation, we’re still nowhere near the target range of 2-3 per cent,” Zeller said.

“Although it was a necessary evil for the greater good, many borrowers are going to be in a world of pain.”

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