‘Rising risk’ Australia’s economy is headed for recession with skyrocketing interest rates

The strain of the soaring cost of living and skyrocketing interest rates – with more hikes to come – has experts issuing a warning about the economy.

There are fears that the risk of Australia falling into recession has risen with early signs pointing to potential financial doom for the country as the strain of soaring inflation and cost of living pressures show no signs of easing.

While retail sales dropped by 3.9 per cent in December, according to Australian Bureau of Statistics data released this week, this won’t be enough for rate hikes to stop – a move that has a delayed impact on the economy and risks plunging it into recession.

The Reserve Bank of Australia (RBA) will need to see a run of data convincing them that consumer spending has truly slowed before it would pull the brake on rate hikes, according to experts.

While economists are split on how many rate hikes are going to hit Aussies, there is no doubt there is more pain headed householders’ way.

Deutsche Bank chief economist Phil O’Donaghoe has warned Australians will be hit with another four interest rate rises up until August to reach 4.1 per cent, which would slam Aussies with an extra $300 in monthly repayments for a $500,000 mortgage.

Interest rate hikes could have far reaching consequences for the economy. Picture: Getty Images

Meanwhile, HSBC chief economist for Australia, NZ and global commodities Paul Bloxham is concerned that Australia is teetering towards recession – flagging a “hard landing” might be needed to tackle eye-watering inflation.

He added that inflation did not seem to have passed its peak – with larger-than-expected gains in consumer prices during the December quarter – placing the RBA in a “challenging position”.

“On monetary policy, the RBA has been more prepared than other central banks to explicitly state that it is seeking to prioritise avoiding a recession, while still getting inflation to head back to its target,” Mr Bloxhom said.

“The RBA has repeatedly noted that it is seeking to keep the economy on an ‘even keel’, but that it is a ‘narrow pathway’ to delivering this soft landing. The path is getting narrower.”

Inflation jumped to 7.8 per cent in January – a 32 year high – after it dropped to 6.9 per cent in October.

But ABS figures showed inflation has hit employee households the hardest, rising by 9.3 per cent – driven by skyrocketing mortgage costs.

HSBC chief economist Paul Bloxham at their Sydney HQ. Picture: Supplied

Mr Bloxham predicted that rates will rise both in February and March.

“The risk is rising that a hard landing is needed to get inflation down,” he said.

“However, we retain our view that once the unemployment rate is rising the RBA will pause, preferring to have inflation above target for some time than to deliver a recession. With elevated inflation likely to persist, rate cuts seem some time away too.”

More than 800,000 Australian households will be facing further financial pressure as many shift to more expensive variable rates in 2023, the Reserve Bank has also forecast.

Finder chief executive Chris Ellis said a survey had revealed that 13 per cent of mortgage holders have missed a mortgage repayment in the past months, with 6 per cent missing more than one.

Mortgage holders are struggling to make repayments with 800,000 due to come off fixed interest rates. Picture: David Swift/NCA NewsWire

Meanwhile 35 per cent of people surveyed said the grocery bill was causing the most stress while 42 per cent of renters were struggling to pay their rent.

Woolworths chief commercial officer Paul Harker said that vegetables, oils and cereals had dropped from record high prices and shipping costs were coming down, but there were still concerns that other factors could continue to push up costs.

This includes oil and energy costs remaining high, while workforce shortages are also pushing up labour costs and impacting on prices with Mr Harker adding that inflationary pressures on packaged groceries were the worst they had been in 20 years.

“In 2023, there are some reasons to be a little optimistic that the very worst of the inflationary cycle is over,” Mr Harker told a Senate select committee hearing on the cost of living.

“We do expect the rate of inflation will moderate across the year, but will remain with us. Rising interest rates and rents will no doubt put further pressure on household budgets.”

Woolworths chief commercial officer Paul Harker. Picture: Supplied

Mr Harker added suppliers had made requests for cost increases with many “well in excess” of inflation.

“This is the result of system-wide input cost pressures which are very real and largely unavoidable for our suppliers,” he said.

“You have a balancing act … customers want an affordable, convenient and high-quality weekly shop. Suppliers want a fair and sustainable trading relationship with us, and we want to remain competitive and relevant in the market.

“Doubtless, we haven’t always got things right along the way, but we’ve sought to balance these various interests as best we can.”

Investment company Etoro’s market analyst Josh Gilbert said Australia had a strong history of avoiding recessions, especially during the GFC.

“However, there is still a chance that Australia could enter into a recession. Recent inflation data showed another monthly increase … This indicates the RBA still has a lot of work to do to control inflation, which may mean they need to raise the cash rate further, ultimately leading to a recession,” he said.

“RBA Governor Lowe has repeatedly stated that ‘we are travelling along a narrow path’ in returning inflation to where it should be and avoiding a recession.”

Recession can be scary for consumers. Picture Gaye Gerard/NCA NewsWire

If Australia does fall into recession, the worry for consumers is that the combination of labour market changes, increased unemployment rates and house prices falling will place additional financial stress on many households, Mr Gilbert added.

“Consumer confidence is low, and individuals are becoming more conscious of big-ticket spending,” he said.

“Recessions can be scary for consumers and are driven by fear of the unknown.

“But history shows Australian economies, companies, and consumers are resilient and do eventually recover. On a global scale, markets eventually bounce back and move significantly higher over time”.

Even if there is no global recession, he warned there would still be a period of economic slowdown.

The IMF predicts house prices will drop by 16 per cent in Australia. Picture: Gaye Gerard/Newscorp- Daily Telegraph

The International Monetary Fund (IMF) has forecast that Australia will tread a “narrow path” to avoid recession and the economy will only expand at just 1.6 per cent this year.

It also predicted unemployment will hit 4 per cent because of rising interest rates and weaker consumer spending.

“Tighter financial conditions, erosion of real incomes amid high inflation, declining housing prices, and soft global growth point to a significant deceleration in Australia,” the IMF executive board said in its annual review of Australia.

Property prices will fall 16 per cent from their pandemic peak in April last year and IMF expects inflation to slow to 5.5 per cent this year and then 3.2 per cent in 2024.