Is a recession coming? Economist warns another rate hike could push Australia towards the brink

The last time Australians were this miserable about their finances, the country was in the grips of a recession.

The nation may not be in one right now, but with how hard some households are struggling, you’d be forgiven for not knowing it.

It begs the question: is another recession on the way? 

Experts say it’s unlikely, but far from impossible.

Unemployment is still at historically low levels, and the overall economy is ticking along, albeit slowly, having consistently recorded positive GDP growth since the start of 2021.

However, recent sentiment data shows households are already at breaking point. 

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Consumer confidence has plunged to levels not seen since the early 1990s recession, as the Westpac–Melbourne Institute index fell 4.7 per cent to 80.4 for October.

Figures were particularly grim following the cash rate lifting to 4.6 per cent – when looking solely at respondents surveyed after the RBA’s decision on September 29, the index plummeted to 67.2.

Australia Institute chief economist Greg Jericho told nine.com.au the country can still dodge a recession – if borrowing costs stop climbing.

“No, but should interest rates go higher, the risk of one is increased,” he said.

Australia’s big four banks are divided over the Reserve Bank’s next move, but ANZ and Westpac predict another 0.25 percentage point hike in November.

None of the major lenders are predicting a rate cut until the second half of next year.

Jericho warned unemployment figures are already showing trouble, with the seasonally adjusted jobless rate rising 0.6 percentage points since January.

“That is not a sign of a strong labour market, regardless of the actual level of unemployment,” he said.

He said unemployment reaching five per cent within the next six months would put Australia on the brink of recession.

Following the RBA’s last rate hike, Governor Michele Bullock was asked whether a recession would be needed to finally put a lid on Australia’s persistent inflation problem.

She said it’s not what the central bank expects, but could eventuate.

“I hope it’s not needed,” she said.

“Are there scenarios in which it might have to happen that way? I guess possibly.

“And the scenario that I’m thinking of there is if inflation expectations get away from us…

“If that gets away, then that is a circumstance in which I think you might need to have quite a dramatic slowdown in the economy to [control inflation] – and that’s our worry.”

She explained that while Australia’s unemployment rate remains historically low, the RBA is trying to bring inflation under control without triggering widespread job losses.

“Job losses, I don’t like the idea of job losses,” she said.

“We’ll do what we have to do to get inflation down because we need to. But if we can avoid massive job losses and a massive increase in the unemployment rate, that is a really important thing to be able to try and do.

Ultimately, Bullock said that tackling inflation was essential to avoid greater economic damage.

“If we don’t address this, inflation will get worse, and interest rates will have to be higher, and the economy in a worse position in order to address that,” she said.

In its snapshot of Australia’s dire consumer confidence, Westpac found soaring living costs and mortgage repayments, rather than job losses, are behind the pessimism.

Petrol prices have climbed almost 25 per cent since the start of the year thanks to the war in Iran, and more than 80 per cent of surveyed consumers expect mortgage rates to increase again. 

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While global oil prices have added to inflation, Jericho argues further interest rate hikes risk hurting households without addressing the overseas factors driving up essential costs.

Instead, he says the government should cushion families against the cost of essentials, citing energy subsidies and halving the fuel excise.

“Yes, this would increase the budget deficit – however, this could easily be covered by taxing gas exports at 25 per cent.

“That would raise around $17 billion a year.“

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