Last updated: August 16th, 2024
If you’re one of many Australians affected by higher interest rates and high inflation — with income growth that’s well short of the rising cost of living — you might feel that we’re definitely in the midst of a widespread downturn in the economy.
While there are no conclusive diagnostic criteria for determining when Australia’s economy is in recession, there are guiding indicators.
Let’s explore what a recession means and how Australia’s economy is performing in 2024.
| Key Takeaways: |
|---|
| Australia faces a ‘per capita’ recession influenced by inflationary pressure and rising immigration levels. |
| Globally, advanced economies continue to face recession as they fight to curb inflation — which poses additional risk to Australia. |
| Revised forecasts from the RBA indicate unemployment will rise, but our GDP growth will remain positive. |
What Does A ‘Technical’ Recession Mean?
If a country’s economy experiences weak or negative growth for six consecutive months, some economists would call it a technical recession.
Above: Economic growth has cooled sharply after the RBA hit the brakes.
The sustained drop in economic growth is measured by the change in gross domestic product (GDP) produced by a country, adjusted for inflation (also known as real GDP).
Important!
Negative growth over two quarters is NOT the definitive yardstick of an economy’s health.
Reduced production is an important indicator — but many global economists also take into account factors including:
- Employment levels.
- Wage growth.
- Manufacturing outputs.
- Retail sales.
- Consumer sentiment.
In Australia, a prolonged decline in GDP combined with a substantial increase in unemployment is generally agreed to signal a recession.
Above: The economy contracts and recovers as part of a normal business cycle. The central bank will adopt a loose monetary policy to prevent a significant decline in economic growth.
This occurs when the business cycle contracts from a peak of economic activity and high prices, leading to less consumer demand and businesses trimming their staff levels.
(Related: Interest Rate Forecast: When Will RBA Cut Rates?
Will High Interest Rates Lead To A Recession?
Recessions are occurring globally due to the slow economic recovery from the COVID-19 pandemic.
Many central banks committed to raising interest rates to stifle inflation — and policy easing is now on the horizon. Questions are arising about whether central banks have left rates too high for too long.
Important!
Efforts to cool demand also contribute to a flattening of economic growth. The trick is getting the balance right, to avoid entrenched economic weakness.
For instance:
- US recession indicators triggered significant stock market falls around the globe in early August. A spike in unemployment in July to 4.3% foreshadows recession according to the ‘Sahm rule’— when unemployment has risen within a 3-month period by 0.5% above its prior 12-month low. The rule has reliably predicted all US recessions in the modern era.
- UK’s latest GDP growth data, released in May, revealed an increase of 0.6% in the first quarter of 2024, bringing the country out of a recession. Growth shrank two quarters in a row, decreasing -0.1% in Q3 and by -0.3% in Q4 in 2023. Inflation slowed to 2% in May, and the Bank of England cut rates to 5.00% on August 1.
- New Zealand also recently emerged from a ‘double-dip’ recession. Its growth dipped for two consecutive quarters in 2022-23, then rebounded briefly, before contracting again by -0.3 and -0.1% in the final two quarters of 2023.
AMP’s head of investment strategy Dr Shane Oliver said the US economy’s perceived resilience to date could have been due to the lags in monetary policy having an impact.
Oliver said the leading indicators in economic growth in Australia have not been as weak as the US but that local recession risk is still 50%.
Compared to many major economies, Australia didn’t raise rates as high.
The current 4.35% was thought to be its peak. Higher than expected March quarter inflation numbers raised the spectre of cash rate rises — concerns that were quelled somewhat by June quarter CPI being in line with forecasts.
Important!
Speaking on its decision to hold rates in August, the Reserve Bank of Australia pointed out that trimmed mean inflation has been above the midpoint of the 2-3% target for 11 consecutive quarters.
In response, many economists have pushed back the timing of the cash rate-cutting cycle in Australia, from somewhere in late 2024 into 2025.
How Does Global Instability Impact Australia's Economy?
A contraction in economic activity domestically is also heavily contingent on how our major trading partners fare — particularly the US and China.
- China’s property sector woes continue, but its government is targeting 5% GDP growth in 2024. Some analysts say there’s no clear plan for reversing the country's slowdown.
- The US economy's growth increased to 2.8% in Q2 according to the ‘advance’ estimate — but the rise in unemployment could signal recession. Its inflation rose in January, February, March and April before steadying in May and declining by 0.1% in June.
The US Federal Reserve held its policy rate at 5.25% - 5.50% when it met in August. Fed Chair Jerome Powell said easing price pressures meant, “a rate cut could be on the table at the September meeting”.
Did You Know?
When the Sahm rule was triggered by July US jobs data, good news on rate cutting turned to fears of a downturn—and global financial markets tumbled. In Australia, the ASX lost more than $160 billion in value over two days.
While stocks clawed back most losses quickly, markets began pricing in the odds of multiple interest rate cuts to stave off recession—including an emergency intermeeting cut.
Now, Forbes reports that US markets imply a single 25-point basis cut by the Fed in 2024 is most likely. That’s the same situation the US was in following its June decision to hold rates.
Above: Slower economic growth and still-firm inflation disappointed the US stock and bond markets, dampening soft-landing hopes.
JP Morgan’s Chief Global Strategist, Dr David Kelly, argues there’s no immediate reason to worry about an outright US recession, saying:
The performance of the US and Chinese economies also acts as a lever for the value of the Australian dollar.
- As the greenback strengthens, the AUD becomes less attractive to investors.
- The AUD is considered a proxy of the Chinese economy because such a huge share of our exports go to China.
When the AUD’s purchasing power is reduced, it can further weaken economic conditions.
What Is Australia's Current Rate Of Economic Growth?
Australian National Accounts figures released by the Australian Bureau of Statistics (ABS) for the March quarter of 2024 show that real GDP rose 0.1% for the quarter and 1.1% over the year.
Quarterly changes in the GDP from mid-2022 and throughout 2023 have been in the positive territory.
| Dec 22 - Mar 23 | Mar 23 - Jun 23 | Jun 23 - Sep 23 | Sep 23 - Dec 23 | Dec 22 -Dec 23 | Annual (Mar 23- Mar 24) | |
|---|---|---|---|---|---|---|
| GDP | 0.6 | 0.5 | 0.3 | 0.2 | 0.1 | 1.1 |
| GDP Per Capita | N/A | -0.2 | -0.5 | -0.3 | -0.4 | -1.3 |
However, when we look at the GDP per capita, which better reflects economic output in relation to our nation’s population — it’s clearly been moving into the negative.
That’s led several commentators to posit that Australia is currently in a ‘per capita’ recession.
What Is A ‘Per Capita’ Recession?
The average GDP per Australian resident has been decreasing since mid-2023. That means each individuals’ living standards are getting worse.
GDP per capita is a helpful measure because the overall GDP doesn’t account for how increased population — such as Australia’s recent uptick in immigration — influences how evenly national income is spread across households or communities.
So, while economic growth at the national level isn’t going backwards (yet), times are tough for many families.
How Migration Can Fuel Negative Growth.
ABS data on overseas migration into Australia for the 2022-23 financial year shows a net gain of 518,000 people. There was a 73% increase in migrant arrivals from the year prior.
Important!
A sharp rise in net overseas migration kept the Australian economy from experiencing a ‘technical recession’, defined as two consecutive quarters of negative aggregate GDP growth.
Population growth is a double-edged sword. It can be critical for filling skill shortages that boost economic activity, but it also increases demand, which puts pressure on the price of housing and other goods and services.
Evidence Of Australia’s ‘Per Capita’ Recession.
There are clear signs of this ‘hidden’ recession, most notably in the way we’re using our household income as finances get tight.
According to the Westpac-Melbourne Institute Index of Consumer Sentiment, in July 2024, consumers were still deeply pessimistic.
The wage price index saw an increase, but it didn’t compensate for inflation’s dampening of Aussies’ purchasing power.
You’ll have noticed that more of your paycheck is needed to cover essential items like rent, mortgage repayments, groceries, utilities, bills, insurance, healthcare, and fuel.
Important!
As a result of increased spending on non-discretionary items, we’ve tightened our belts when it comes to household spending on non-essentials (e.g., fewer gifts, outings or new furniture).
Above: Australians are still struggling to save.
Is Australia’s Quality Of Life In Decline?
With wages not keeping pace with inflation, less disposable income and less ability to tuck away savings, life has become much harder for many Aussies.
Research from market research firm Roy Morgan shows that 30.3% of Australians were at risk of ‘mortgage stress’ in the three months to June 2024.
It’s becoming a major health issue, too.
People are struggling to pay for healthy food and healthcare, and many people are highly stressed and yet forced to work more to earn more.
Important!
Half of Australians reported cost of living pressure and personal debt distress beyond normal levels, according to a March survey by Suicide Prevention Australia.
Everyone at the margins is being squeezed.
Australian businesses, especially consumer-facing ones, are also feeling the brunt of inflation.
NAB’s monthly survey of businesses in May showed confidence had fallen into negative territory. It lifted back into positive territory in June at +4 index points, but business conditions edged down and were below the long-run average.
Deepening concern about inflation’s impact, the survey found that both business costs and product price growth remain elevated:
- Labour cost growth was 1.8% (easing from 2.3% in May).
- Retail price growth rose by 1.5%, on par with 1.6% in May.
Small and micro business owners are in trouble.
In a recent submission to Fair Work Australia regarding wages, the founder of Entrepreneurial & Small Business Women Australia, Amanda Rose, said:
Is Australia Going Into A Recession?
Pessimism about a recession is high among Australians.
The Dye & Durham Australian Market Pulse survey released in April 2024, which involved more than 1,500 people, found more than half believe Australia will enter a recession in the next year.
The prediction for 2024 is for below trend but still positive economic growth and an RBA rate-cutting cycle that will start in late 2024 as inflation starts easing.
A strong rise in unemployment — typically associated with a recession — is not foreseen.
Key forecasts from the RBA out to December 2024 include:
- GDP growth of 1.7% (revised up from 1.6% in May).
- Unemployment rate of 4.3% (It’s currently 4.1%).
- CPI inflation of 3.0% (revised from 3.8%).
Domestic demand looked to be cooling earlier in 2024, with retail sales falling by 0.4% in March 2024 and rising by just 0.1% in April.
Judo Bank's Chief Economic Advisor Warren Hogan — a prominent economist flagging rate hikes, instead of cuts, this year — said that was a good sign.
Important!
Retail activity rose in both May (0.6%) and June (0.5%). KPMG said the turnover figures masked an underlying weakness in trade volumes and reflected cautious shoppers bringing forward future spending to take advantage of end-of-financial-year sales.
After interest rates were held in August, Hogan said the RBA’s upwardly revised core inflation forecasts highlights the delicate balance:
In August 2023, ANZ’s chief economist Richard Yetsenga said that in the unlikely event that Australia went into recession, it would be relatively brief and mild.
He also argues that the RBA has “plenty of firepower” to cut rates significantly from its current position of over 4% if inflation doesn’t start easing and unexpected economic weakness occurs.
Of course, if the US did slide into recession, it could hamper global growth — the ripple effects on demand for our exports would impact growth in Australia too.
How long will Australia’s ‘per capita’ recession last?
Westpac economist Ryan Wells said the bank anticipated a slowing in net migration, with an annual change of 1.9% in 2024.
Wells said:
How Did Australia Fare In Past Recessions?
Recessions vary in severity and duration. How sharply growth slides and for how long depends on the impetus for the decline and how policy-makers respond.
Since then, Australia has seen one of the longest stretches of economic growth in modern history.
Australia’s strong population growth, supported through migration, has been an important reason for the nation’s continued growth throughout various ups and downs in global conditions.
Global Financial Crisis Put A Handbrake On Economic Growth.
Many economies worldwide went into recession during the Global Financial Crisis (GFC).
Growth slowed in Australia, unemployment reached 5.75%, the Aussie dollar lost value, and equity prices declined sharply to reduce the wealth of Australian households by nearly 10% by March 2009.
Covid Pandemic Strained The Australian Economy.
More recently, the COVID-19 pandemic triggered one of the worst ever global recessions, as lockdowns and travel bans stymied growth and led to significant job losses in most advanced economies.
Important!
Australia’s economy entered a recession for the first time in 29 years in the first half of 2020, due to restrictions put in place to contain the Coronavirus pandemic.
However, the economy rebounded in the third quarter of 2020, with GDP increasing by 3.3% as restrictions eased and government stimulus funding had an impact on people’s spending.
The rebound effect post-COVID is one of the reasons cited for rising inflation, which has gripped the Australian economy (and numerous other economies globally) ever since.
(Related: AUD To Euro Forecast: More Surprises Ahead?)
What Happens If Australia Goes Into A Recession?
The word recession seems synonymous with ‘bad times,’ but at best, it’s an approximation of economic health.
When the economy stalls and starts to move backwards, we expect business profits to shrink and lots of people start losing their jobs.
However, while our GDP growth and unemployment numbers may not indicate a significant and lasting reduction in economic activity — it’s clear that for many Aussies, living standards are in decline and there’s no immediate sign of relief.
Jody
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