Flirting with recession: Will Australia follow New Zealand?

Still feeling lucky? The odds of Australia following New Zealand into a recession are now 50:50, according to high-profile economists who for months had been predicting we would more likely experience a soft landing.

It was a strong wind called Cyclone Gabrielle that ultimately tipped the New Zealand economy into recession – albeit a mild one.

RBA governor Phil Lowe may only have a few more opportunities to fire the interest rate gun at inflation.Credit: Alex Ellinghausen

But whether a gust of wind could topple Australia off the narrow path that the Reserve Bank of Australia is walking between raising rates and avoiding an economic contraction is now in sharper focus.

At this point, we are certainly flirting with recession.

The softening in the economy has been evident all year, as has the fact that inflation has peaked and is abating.

But inflation is not falling precipitously enough for the RBA, which made it clear that it will remain zealous until the inflation genie is safely back in its bottle.

Meanwhile, RBA governor Philip Lowe’s chances of retaining his job beyond September are worse than the aforementioned odds of a recession.

This gives him only a few more opportunities to fire the interest rate gun at inflation before he leaves his post – and he will want to make them count.

Lowe wants to navigate the path successfully to keep Australia from recession, but he is prepared to have a downturn rather than entrench inflation longer term and deal with its damaging effects.

That gives him plenty of incentive to move more aggressively on rates and entrench his legacy as a central banker prepared to do what it takes to fix inflation.

Regardless of whether we actually reach the technical definition of recession – two quarters of negative growth – feels a bit academic.

Because the difference between economic growth slowing to a crawl or going backwards slightly can be difficult to discern in the community.

Higher interest rates are already having an impact on the cost of borrowings for companies and households. It will also continue to put the brakes on consumer spending and likely show up in sluggish profits in the current half to the end of June and the next half to December.

Some corporate sectors will be more immune to the slowdown, but cyclical stocks will be under more earnings pressure. And oil, gas and mining stocks won’t be powering enough to offset this pressure.

At this stage, economists from the big four banks are still factoring in economic growth this year and next – ranging from tepid to mildly tepid.

These forecasts are sufficiently weak that a negative economic gust could alter that outcome. The chief economist from the Commonwealth Bank, Gareth Aird, and his counterpart at the National Australia Bank, Alan Oster, are calling it a 50:50 bet.

Westpac’s Bill Evans, who is looking for economic growth in 2023 of only 1 per cent and 1.5 per cent next year, says we are already in a consumer recession and its spread to the broader economy depends on whether business investment continues to hold up or falls in a hole.

ANZ’s chief economist Richard Yetsenga is a little more optimistic and takes a view that there will be no recession – in part based on the 2 per cent increase in Australia’s population.

To the extent there is a consensus, the future of near-term economic growth (or not) will largely be determined by whether the RBA continues to push back hard on inflation.

The strong jobs numbers released on Thursday have moved several in the economics herd to predict that Lowe will move rates up again in July.

The US Federal Reserve, which paused its rate hikes this week, is already hinting that it may need to raise again later in the year in response to the stubbornness of inflation. And the economic jitters continue.

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