Grim warning for Australia as risk of ‘major recession’ looms for the US

There are growing signs the US is lurching towards a “major recession” within months – and it could mean “bad news” for Aussies.

A banking giant has warned of a “major recession” looming for the US – and it could have serious impacts on the Australian economy.

In a chilling report to clients with the grim title “Why the coming recession will be worse than expected”, Deutsche Bank this week claimed that the US Federal Reserve’s attempts to quell inflation would lead to a more serious downturn than previously anticipated.

“We will get a major recession,” Deutsche Bank economists wrote in the report, arguing that it would take a “long time” before inflation falls down to the target goal of 2 per cent, which therefore meant interest rates would likely be jacked up significantly, and in turn would harm the economy.

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Deutsche Bank believes the US is facing a “major recession”. Picture: iStock

“We regard it … as highly likely that the Fed will have to step on the brakes even more firmly, and a deep recession will be needed to bring inflation to heel,” the report reads.

“The scourge of inflation has returned and is here to stay.

“It is sorely tempting to take a go-slow approach hoping that the US economy can be landed softly on a sustainable path. This will not happen.

“Our view is that the only way to minimise the economic, financial and societal damage of prolonged inflation is to err on the side of doing too much.”

According to the bank, a range of factors were contributing to the inflation nightmare, including supply chain woes caused by China’s Covid lockdowns and the invasion of Ukraine, and climate change.

‘Bad news’ for Australia

But what does all that doom and gloom mean for us?

AMP chief economist Shane Oliver told news.com.au that while a US recession wasn’t yet a certainty, with some financial experts taking the more positive view that it could still be avoided, a downturn in the US would be “bad news” for Aussies.

“We think if it comes, it won’t be until late next year. The main argument is that the Fed is raising interest rates, like the Reserve Bank of Australia (RBA) will do here, and that will trigger a recession,” he explained.

“Historically, it has taken a while for that to happen in the US, and interest rate hikes initially don’t have much impact – it’s only after multiple hikes that we see a dampening in economic activity.

“It might not really be apparent until later next year, and there are a lot of questions marks over whether we will see a recession, but if it does happen, it will be bad news for Australia.

“The US is the world’s biggest economy … and it does affect business and consumer confidence, and it does affect demand for our exports simply because the US is part of the global economy, although it’s not the same as China which is our biggest export market.”

But Dr Oliver said history had shown that Australia was able to sail through periods of serious US recessions relatively unscathed, including the GFC and the tech wreck of the early 2000s.

A US recession is not yet a certainty, but things aren’t looking rosy. Picture: iStock

“Just because the US has a recession doesn’t mean we will as well, but it would have a negative impact on economic growth in Australia,” he said.

According to IG Markets Analyst Hebe Chen, the past two decades have proved a “strong correlation” between the US and Australia’s GDP growth – which means that “a pullback in the US economic growth is likely to translate into a shrinking demand for Australia’s products and indirectly impact our job market”.

Ms Chen told news.com.au that given the US was a “predominant source and destination for investment and capital flows for Australia”, our economy could be “compressed” alongside America’s.

“Plus, an additional factor that we shouldn’t overlook: for the past decade, the rise of China has acted as a backbone for Australia’s economy by injecting money into commodity, travel, and education sectors, before the pandemic and the bilateral relationship turned sour,” she added.

“That is to say, what lays ahead for the Australian economy is not only a US recession but a double whammy from the two largest economies in the world.”

Meanwhile, on Wednesday morning, the Australian Bureau of Statistics revealed consumer prices rose by 2.1 per cent to a more-than decade high during the March quarter and were 5.1 per cent higher through the year.

The result was even worse than the market had been bracing for, and has fuelled speculation the RBA could announce an interest rate hike as soon as next Tuesday in a bid to push down inflation.

At the moment, experts are expecting the cash rate to rise from the current rate of 0.1 per cent to more than 3 per cent by the end of 2023, which would mean more than a dozen rate hikes are on the horizon over the next 18 months.

Angus Coote, co-founder of Jamieson Coote Bonds, told news.com.au that the signs were “quite concerning” for Australia, after recently telling the ABC he believed there was a “pretty decent chance of Australia going into recession”.

Aussie households are bracing for an interest rate hike. Picture: iStock

“Are we going to see some interest rate hikes? Absolutely,” he said.

“The inflation pulse is building – we’ve had artificially low interest rates for too long, and now things have moved on … the question is how will the household sector cope with higher rates?

“Monetary policy can be a very blunt tool. Hiking up interest rates solves what is essentially a supply problem, by getting inflation lower, but the impacts of that can be very brutal, which we saw in the 90s.”