‘Severe recession’: Experts warn of nightmare scenario facing Australians

Experts have warned of a “bleak” nightmare scenario potentially facing Australians, with the risk of a looming “severe recession” on the cards.

There's a chance a "severe recession" could be on the cards. Picture: iStock

A peak industry body has warned it is “plausible” that Australia could be hit by a “severe recession” in the years ahead as the economic pain facing the country escalates.

A new report by the Actuaries Institute, the country’s peak actuarial body, has revealed the “three alternative futures” that Australia could face, describing the scenarios as “all plausible and all with vastly different outcomes for Australians”.

Actuaries are behind-the-scenes data experts who specialise in analysing risk, and the sobering report outlines the possibility of three future outcomes, including stagflation, a major house price correction and adoption by policymakers of Modern Monetary Theory.

Alarmingly, the institute reveals that “all three scenarios are bleak, resulting in a significant recession sometime over the next 15 years”.

Actuary Hugh Miller, who collaborated on the Green Paper with independent economist Michael Blythe, said the baseline scenario, which is the benchmark for the three alternative futures, is the only one that avoids a recession with positive although modest GDP growth rates but still involves rising downside risks. This is the central case, or expected path, for the Australian economy and financial markets at this point in time.

However, the three other scenarios involve policy makers veering off course and burdening businesses and the public with stagflation, mismanaging a collapse in house prices, or excessive government spending, leading to dire consequences for the nation.

There's a chance a "severe recession" could be on the cards. Picture: iStock

Scenario one is stagflation – meaning a period of high inflation coupled with high unemployment – which the paper notes is “plausible in the current environment” considering high energy and food prices, supply chain pressures and supply chain woes.

Under this example, we would see “expansionary fiscal policy, too loose monetary policy and

supply side constraints” which would combine to drive a “wage price spiral”, with inflation peaking at around 9 per cent.

“The eventual solution is a severe recession, including high unemployment and high long-term government bond yields,” the report states.

The second alternative future is a major correction in house prices, which have already fallen significantly across the nation.

Under this scenario, a 30 per cent fall in prices is examined, which would be triggered by an “overly aggressive RBA tightening cycle that leads to a cascading effect across the economy and financial system”.

The economy could only move out of recession once the RBA reversed its course and the nation shifted to expansionary policy settings.

Finally, the third option is the adoption of Modern Monetary Theory (MMT), which focuses on achieving full employment by funding government expenditure through creating money rather than issuing debt.

However, the paper notes that MMT was “not well suited to dealing with the resultant boost to inflation”.

Reserve Bank governor Philip Lowe. Picture: NCA NewsWire/Christian Gilles

And the institute noted that “while these alternative future scenarios appear bleak, involving a significant recession at some point, optimistic alternative scenarios are plausible”.

It comes as Australian companies are facing increased pressure from the probability of a recession, skill shortages and increased competition, with recent research from Aon revealing a whopping 79 per cent of business leaders are expecting a recession, with only 35 of them of them feeling “very prepared” for it.

It also comes after the RBA hiked Australia’s official cash rate by 25 basis points to 3.10 per cent earlier this month – the eighth consecutive rate hike this year, marking the return of the cash rate to its highest level since November 2012.

At the time, Callam Pickering, APAC economist at global job site Indeed, predicted that further hikes are “likely next year until inflation is under control or genuine cracks begin to appear across the Australian economy”.

“Nevertheless, the pace of policy tightening should slow next year. The market anticipates the cash rate peaking at just below 3.6 per cent next year, which would imply only two more 25 basis point hikes. That’s in stark contrast to the eight consecutive rate hikes we’ve had this year,” he said.

“That’s perhaps a surprise given that inflation remains red hot. The RBA’s latest inflation outlook would justify aggressive hiking next year but that needs to be balanced against the risks of a severe downturn or recession.”