Recession fears keeping RBA’s Bullock awake at night

RBA governor Michele Bullock. Australia’s commodity-rich economy is flirting with a recession at the moment and economists are searching for a pulse after several quarters of dreadful growth. Picture: NewsWire / Nikki Short

Ask any good central banker what keeps them awake at night, and you’ll be able to judge with far greater certainty where interest rates will go over the medium term.

For Michele Bullock, the Reserve Bank of Australia’s governor, the response would of course be sustained high inflation, but she’d quickly add a deep-seated fear of a recession too.

Australia’s commodity-rich economy is flirting with a recession at the moment and economists are searching for a pulse after several quarters of dreadful growth.

The economy grew just 0.1 per cent in the first quarter, down from 0.3 per cent in the prior quarter and 0.2 per cent in the quarter before that. It’s just keeping its head above water.

For Bullock, who has capably steered the RBA since becoming governor in September last year, a recession would be counted among the worst possible outcomes on her watch.

Yet with the official cash rate expected to remain higher for longer, or even rise further to address stubborn inflationary pressures, a recession at some point in the next year looks pretty likely.

In coldly economic terms, a recession is simply two consecutive quarters of contracting GDP growth.

But to a person like Bullock, who spent a large part of her career at the central bank presiding over financial stability concerns that directly addressed so-called “dinner table” issues, it would represent far more than just a few numbers on a spreadsheet.

She is probably more aware than most of the potential pain that will come to households and the broader economy if growth goes into a deep dive.

A recession would bring with it accelerated business bankruptcies, a jump in mortgage arrears, and the potential for unemployment to gap higher.

That’s the nightmare that most likely has Bullock pacing the hallway at night, or watching early morning re-runs of sitcoms to take her mind off things.

If unemployment jumped from its current level of 4 per cent to around 5 cent due to a recession, Bullock would judge that a personal policy failure.

But there’s an even more insidious side to the discussion about recession in Australia. Australians don’t cope with them at all, and the backlash would be real.

The blow back on the RBA and the federal Labor government, which faces an election within the next twelve months, would be significant. So there would be massive political fallout, that in theory is no business of the RBA, yet in reality would have a big influence on policy making going forward.

The RBA is often assailed by external political forces, the most recent example being the departure of former governor Philip Lowe last year amid heated criticism.

Older Australians talk at length at parties about how they survived the recession that crunched the economy in the early 1990s.

It delivered a huge shock to businesses and the economy was saddled with long-term unemployment for years after, as firms very slowly regained confidence.

The psychology around recessions in Australia stands in contrast to places like New Zealand, which has bobbed in and out of recession for the last year and half.

For the RBNZ, a recession appears to be just part of doing business in the face of an overheated economy and the biggest inflation blowout in many decades.

So as the RBA weighs the economic risks over the next year, understand that avoiding a recession is extremely high on the list of its priorities.

Crucially, it’s not viewed as something that might need to be willingly embraced in order to finally kill off inflation.

But it does argue strongly for the case that the RBA will tolerate nagging inflation risks for longer than some expect. In short, it means the bar for a further rise in interest rates is elevated indeed.

The Wall Street Journal