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US recession looms: How Australia will react

A cartoon of three men trying to hold on to a pile of cash that is being dragged up by a large balloon labelled 'inflation' so signify an oncoming recession.
If the US falls into a recession, can we assume Australia will follow suit? (Source: Getty)

Rising inflation is wreaking havoc, with the United States teetering on the edge of a recession.

And, as the saying normally goes, “when the US sneezes, the world catches a cold”. But does that mean a recession in Australia is unavoidable if the US is plunged into one?

The same goes here as it does in the States - the cost of living is surging and the respective central banks are lifting the cash rate to try to keep up.

But, inflation here isn’t as high as it is in the US (5.1 per cent vs 8.6 per cent) and our economy has been “very resilient” according to Reserve Bank (RBA) governor Philip Lowe.

So, let’s take a look at what the experts are saying and if we really have to be concerned.

Likelihood of a US recession

Betashares chief economist David Bassanese predicted a US recession could be closer than we think.

“Given stubbornly high US inflation and the Federal Reserve’s apparent determination to bring it down, I now foresee a US recession within the next 12 months,” he said.

“Specifically, I anticipate the US National Bureau of Economic Research (NBER) will, at some stage between now and end-2023, declare that a US recession began between June 2022 and June 2023.”

Will Australia follow suit?

It’s not guaranteed.

As it stands, there are some noticeable differences between the Australian economy and the US economy.

For one, US economic growth was negative in the March quarter - the Australian economy on the other hand grew (+0.8 per cent).

And, when it comes to unemployment the US Federal Reserve anticipates unemployment to grow slightly from 3.6 per cent in May to 3.7 per cent by the end of 2022.

And the jobless rate is tipped to edge higher to 3.9 per cent by the end of 2023 and 4.1 per cent by the end of 2024.

On the other hand, Australian unemployment is expected to continue declining.

But, despite these differences, nothing is guaranteed, Basanese said.

“While I am still hopeful the Australian economy can avoid recession, it is at least a 40 per ent risk in the coming 12 months,” he said.

What can be done to avoid a recession?

For the most part we just have to hope the RBA and Government do their part to help.

The RBA is following the US’s lead and “front-loading” rate rises.

This basically means they’re hiking big and hiking fast to get on top of rising inflation before it spirals out of control.

This means they can hopefully pull-back on rate rises sooner - it’s a plan that centres on short-term pain for long-term gain.

On the policy side, the Albanese Government has praised the Fair Work Commission’s decision to lift the minimum wage 5.2 per cent (0.1 per cent more than inflation).

This should help workers keep up with the rising cost of living so people keep putting money back into the economy.

Obviously, there are a range of factors that can impact the economy and, as has been evident from the past two years, you never know what might happen.

But, for now, the signs are pointing to Australia avoiding a recession.

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