Last updated: April 21st, 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 have committed to raising interest rates to stifle inflation.
For instance:
- UK’s latest GDP growth data, released in March, revealed that the country fell into a recession. Growth shrank two quarters in a row, decreasing -0.1% in Q3 and by -0.3% in Q4 in 2023. In March, the Bank of England left its rates on hold at 5.25%, following 14 consecutive increases between December 2021 to August 2023.
- New Zealand recently experienced 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. NZ’s cash rate remains high at 5.5%. It’s been on hold at that rate since May 2023.
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.
Compared to many major economies, Australia didn’t raise rates as high. The current 4.35% is its expected peak.
Due to signs that inflation is headed in the right direction, a cash rate-cutting cycle is anticipated to start in the final quarter of 2024.
Above: Thirteen consecutive interest rate hikes have caused Australian households much financial pain but succeeded in taming Australia’s inflation.
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 is forecasting growth of 2.1%, but its inflation isn’t taking a direct path downwards. It rose 0.3% in January and 0.4% in February.
The US Federal Reserve projections from March this year indicate 75 basis points in rate cuts throughout 2024, and 150 basis points by 2025.
Above: Financial markets and the Fed anticipate the end of tighter monetary policy starting in June.
Economist David Rosenberg says it’s a sign that a recession is coming, and others have expressed scepticism of a soft landing.
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 December quarter of 2023 show that real GDP rose 0.2% for the quarter and 1.5 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 | Annual (Dec 22-23) | |
|---|---|---|---|---|---|
| GDP | 0.6 | 0.5 | 0.3 | 0.2 | 1.5 |
| GDP Per Capita | N/A | -0.2 | -0.5 | -0.3 | -1.0 |
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 reducing since mid-2023. That means each individuals’ living standards are getting worse.
Above: Annual % change in GDP per Australian.
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!
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 March 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 pay check 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 (up 5.6%) in January 2024, according to the ABS), we’ve tightened our belts when it comes to household spending on non-essentials (e.g., fewer gifts, outings or new furniture).
- It fell from 2.8% to 1.1% in the September 2023 quarter — the lowest since December 2007.
- While it rose to 3.2% in the December quarter — the disparity between income and expenses is still being felt.
Above: Australians are struggling to save, despite a small uptick in the last quarter of 2023.
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 31.4% of Australians were at risk of ‘mortgage stress’ in the three months to February 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.
Small and micro business owners who cannot compete due to rising labour and materials costs — plus subdued spending — are also 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 was high among Australian industry professionals in August 2023. A survey found 70% anticipated a recession within 12 months.
The prediction for 2024 is below trend but still positive: economic growth and an RBA rate-cutting cycle 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 June 2024 include:
- GDP growth of 1.8% (year-ended).
- Unemployment rate of 4.3% (It’s currently 3.8%).
- CPI inflation of 3.2%.
Retail sales growth has improved after a depressed 2023, with positive month-on-month growth in January (1.1%) and February (0.3%) of 2024, according to the ABS.
Important!
This could be short-term, given that the lift was largely attributed to seven Taylor Swift concerts held nationally.
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.
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.
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 at best.
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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