Can Australia Escape a Recession?

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The Australia Letter is a weekly newsletter from our Australia bureau. Sign up to get it by email. This week’s issue is written by Natasha Frost, a reporter with the Australia bureau.

In September 2020, as the effects of the coronavirus pandemic hit all over the world, Australia dipped briefly into a recession — then bounced straight back out again the following year.

The nation sometimes referred to as “The Lucky Country” is known for its rock star economy: a gold-plated combination of rich natural resources, easy trade, a talented, well-educated work force and historically healthy immigration rates.

That economic wobble in late 2020 was as rare as it was brief: Australia had not been in recession since 1991, even skirting neatly by the 2008 global financial crisis.

The rest of the world faces a grim outlook, with recession likely for Britain, the United States and many of the member states of the European Union, among other nations. Kristalina Georgieva, the head of the International Monetary Fund, has said she expected a third of the global economy to enter a recession in 2023. So where does Australia stand?

For now, very few economists in Australia are forecasting a recession — two back-to-back quarters of negative economic growth — as their central case, said Nicki Hutley, an independent economist based in Sydney. “I wouldn’t be in there yet, but I would certainly rate it as at least a 50 percent chance,” she said.

In many respects, Australia is doing better than its international peers. Wages remain fairly restrained, the economy is growing, and the unemployment rate is at a record low 3.4 percent. The country is also less affected by the shock of high energy prices already bedeviling Britain and Europe. Consumer spending also remains strong, even as Australians have dipped into their savings for discretionary goods and services.

The Australian Reserve Bank is forecasting an annual rate of inflation of close to 8 percent for the year ending December, falling to 4.7 percent by the end of 2023, before easing further to just over its targeted 2 to 3 percent by the end of the next year.

Speaking last year, Jim Chalmers, the Australian treasurer, said the economy was “performing solidly in the face of steep headwinds from overseas as well as considerable and compounding pressures on Australian families and businesses.”

But there are storm clouds on the horizon.

“Whether it’s a technical recession or not, we certainly are going to be in for difficult times, the economy will slow, people will notice this,” Hutley said. “A lot of households will do it tough, and a small number of households will do it particularly tough.”

The cost of living crisis is yet to abate, and dismal prospects for other major world economies may also make conditions harder domestically.

Harsh monetary conditions imposed to tackle inflation will hit mortgage-holders hard, especially from the middle of the year. Australia has far more floating rate mortgages than many other countries, putting pressure on household budgets as rates are adjusted.

A major fall in property prices would also be bad news for many Australians: Housing comprises almost 60 percent of household wealth. Already, prices in state capital cities fell 5.3 percent last year, in the largest decline since 2008.

China is perhaps the biggest question mark in Australia’s economic forecast. The country has long been the country’s largest trading partner and is, as of this week, reportedly considering lifting a more than two-year-old unofficial ban on Australian coal imports, amid a thawing relationship. Yet its choppy reopening, after it abruptly abandoned its “Covid zero” approach, carries with it tremendous uncertainty.

“We’re less concerned about the nuances of trade with some of that trade with China, and more concerned about the overall strength of the Chinese economy,” Hutley said. “If everything starts to go down, then it doesn’t matter whether they’re buying our coal or not, they’re not going to be buying a lot of anything.”

Here are the week’s stories.

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