Should I be worried about the looming recession?
As interest rates rise and inflation increases, people are growing more concerned that we may go through an impending recession in Australia.
While signs of a looming recession in 2022-2023 have increased significantly, economists are saying otherwise. In fact, most are predicting Australia will avoid it. Nevertheless, there are worries key countries around the world will ultimately drag Australians into tougher economic times.
In this article, we’ll look into recession in greater detail and its impact on the job market for Australians.
A “probable recession” but nothing too alarming
Most senior economists at this point are confident that Australia can avoid, or at least survive a dreaded recession should one ever occur.
For example, senior economist Diana Mousina is observes that “(in Australia), GDP is expected to slow down around 2% by December 2023” due to:
- Consumer spending growth weakening as interest rates rise.
- Housing construction growth has decreased due to being in a higher rate environment with demand being brought forward in 2020-2021.
- Exceptionally right labour market and levels of savings in the economy.
Mousina also claims that business investment growth is expected to remain unchangeable but may be negatively impacted by possible high inflation and lower consumer demand.
Government spending is also likely to be positive but lower compared to recent years as budget deficits are reduced with the export sector remaining the same as demand for commodities is high.
With this in mind, such contradictory predictions can hopefully insulate Australians from any negative economic shocks that originate overseas.
However, not all economists are optimistic.
Others are fearful that, because many countries are lifting interest rates in a frenzy, global growth will slow significantly over the next 12 months, with Australia being caught in the fall out.
A recession is most likely “on the cards” for Australia as Jo Masters, chief economist of Barrenjoey predicts.
Why? Partly because the RBA will be forced to continue increasing interest rates as long as other countries do so, leading Australia’s economy into recessionary territory.
Where does the Reserve Bank of Australia (RBA) fit into the looming recession?
The Reserve Bank of Australia’s current cash target rate is 2.35%.
While Jo Masters is confident that “a cash rate around 3% would be sufficient to bring inflation back down into the RBA’s target band by early 2024, but the RBA will probably end up lifting the cash rate to 3.35 per cent”
This could have dire economic consequences for the Australian economy, weakening growth outlook and the unemployment rate lift.
This is compounded by the fact that the RBA has raised its current cash rate by 75 basis points over the past few weeks. It will continue to increase upwards until spring. The worry from economists is that by exponentially hiking up rates to stamp out reflection, the RBA might slow economic growth so much that it goes backwards.
“The 75 basis points worth of interest rate hikes so far have already started to dampen economic activity, with further declines in home prices, a fall in consumer sentiment and some slowing in weekly consumer credit card spending,” according to Diana Mousina.
Mousina observes that the unemployment rate will eventually rise back over 4% in late 2023, after bottoming at 3.5% later this year.
However, all is not lost.
The good news is that there are enough positives for Australia to stay out of recession territory entirely.
“Consumers have a buffer of accumulated savings from the last 2.5 years of fiscal and monetary stimulus and low spending on services (worth $250bn),” she said. “The pipeline of residential construction work still to be done is ~40% above pre-COVID levels which will add to economic growth, the business investment outlook is the best that it’s been at for years with mining investment set to rise by +16% in 2023 and non-mining by +17%.”
She also noted that state and federal governments are in the process of implementing “growth-friendly policies” including childcare spending and infrastructure.
What does this mean for ASX shares?
According to Mousina, AXS shares are yet to fall in a prolonged drop, only losing just 15% of their share prices since their early-year peak.
She does warn that more pain points could come for future investors in the coming few months. But, once inflation is under control, ASX shares will be the place to be.
The recession and impact on job market
While a recession is plausible, Bill Evans Chief economist at Westpac believes that Australia may experience a couple negative quarters in 2023. However, Australians shouldn’t be too concerned (of the risk of losing their jobs) due to the low unemployment rate at present.
“Normally, when you go into a downturn like this, the unemployment rate climbs quickly. We expect the unemployment rate to rise to 4.2 next year, but because it’s coming from such a low base, most people will keep their jobs,” he explains.
Chief economist at KPMG Sarah Hunter agrees with this statement, outlining while conditions around the world remain volatile, Australia is better placed than most.
“While conditions are likely to become more difficult over the near term, the strong recovery from the pandemic, which is clear in the GDP and employment data, means the (Australian) economy is better placed than most other countries to weather the storm.” she shares with SBS News.
In light of this, the current forecasts of a crippling Australian recession are somewhat pessimistic.
That being said, two groups of workers that are at greater risk of losing their jobs should remain cautious and begin searching for more permanent employment opportunities. These groups include:
- Young workers (mostly Generation Z), under the age of 24 who are the “first to be sacked” due to their inexperience and usually the last age bracket be hired.
- Australian men and women who have quit their permanent full-time jobs amid the Great Resignation (or in Australia’s case, the Great Reshuffle), in exchange for more remote working arrangements may also face uncertain job prospects, if the economy falls into a recession.
Dr Greg Jericho, the Centre for Future Work‘s Policy Director, said with the growth of hybrid, casualised and contract work, and the number of increased freelancers in the workforce could lead to ramifications on job security. Nevertheless, he hopes the Australian government will implement necessary safety precautions to keep people in the workforce, and maintain today’s low unemployment rate.
Concerned that a looming recession could impact your employment? Gough Recruitment’s consultants in property, real estate and construction will be more than happy to answer any questions that you may have and give you invaluable insights into the current job market.