Australia Faces Heightened Risk of Recession as RBA Signals Tough Road to Low Inflation

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The Reserve Bank of Australia’s (RBA) recent surprise rate hike and warning of future tightening have raised concerns about the risk of a recession in Australia. 

Economists are now factoring in the possibility of at least one more rate rise and a genuine risk of recession, which would be the country’s first in three decades.

HSBC’s chief economist for Australia, New Zealand, and Global Commodities, Paul Bloxham, predicts a high risk of outright recession, with quarterly growth averaging only 0.1% and a 50% chance of entering a recession. 

Similarly, the Commonwealth Bank of Australia puts the odds of a recession this year at 50%, projecting slow growth with an annual rate of 0.7% in the last quarter and a rising jobless rate of 4.7% by mid-2024.

The economy’s growth has already slowed, as evidenced by the recent data showing a mere 0.2% growth in the March quarter. This slowdown has been attributed to households depleting savings and reducing spending. The bond yield curve has also inverted, a signal that investors are becoming increasingly concerned about the risk of a recession.

The RBA’s focus on reducing inflation comes at the potential cost of job preservation and could lead to higher inflation expectations. While RBA Governor Philip Lowe has emphasized the desire to preserve job gains, he has clarified that the Board will not tolerate persistently high inflation. Pushing rates higher to combat inflation raises the likelihood of Australia entering a recession.

A survey of union officials cited by Lowe has shown that medium-term inflation expectations have risen to 3-4%. The RBA remains determined to bring down inflation, even if it means a bumpy landing for the economy.As the RBA’s actions and warnings reverberate through the economy, Australia finds itself at an increased risk of a recession. The outcome will depend on how effectively the RBA balances the goals of reducing inflation and preserving job gains in an uncertain economic landscape.

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