UBS Predicts Rba Rate Hike Won’t Lead To Recession

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The Australian economy has been through tough times yet still managed to stay afloat without plunging into a recession.

Paul Donovan, a chief economist at UBS, believes that equity markets carelessly price in purchasing managers’ indexes (PMIs) at a lower rate than reality. The S&P Global manufacturing PMI for Australia was expanding at 53.5 points for September; purchases and profits are growing as the 50-point mark separates expansion and contraction.

“PMIs have been consistently above 50 for several months now, suggesting that the Australian economy has already moved past its soft patch and is expanding again,” Donovan says.

Donovan also believes that if the Reserve Bank of Australia (RBA) does decide to raise interest rates, it will be because economic conditions warrant it, not because they feel pressured to follow in the footsteps of other central banks.

“We believe the RBA will not raise rates just because the US Federal Reserve did, but rather due to its assessment of the strength of the economy,” Donovan says. “If this is the case, a rate hike should not be a cause for concern and could even be seen as a positive sign for the economy.”

Despite this, UBS said its third-quarter Australian consumer survey indicated that households would stay strong in the face of higher rates.UBS also pointed to the RBA’s more aggressive tightening cycle in 1994, which did not end in a recession for Australia. ASX equities moved 16 per cent higher the following year, with an average annual return of 11% over five years after 1994; Australia was technically in recession from 1990-1991.

UBS maintains its forecast for the RBA. “This should not cause a recession as long as consumer confidence remains strong and the housing market stabilises. Ultimately, it is up to consumer spending to drive growth and avoid recession.”

“We see an RBA hike as unlikely to lead to recession and could even be helpful for the economy,” UBS said in its report.

Investors should remain cautious, however, as higher rates do have the potential to dampen consumer spending and slow down economic growth. It will be necessary for investors to closely monitor critical indicators such as unemployment, consumer confidence, and inflation to gauge the effects of a potential rate hike on the economy.

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