Australia’s risk of an economic downturn jumped to the highest level since the pandemic, a Bloomberg survey showed, with the Reserve Bank now expected to raise interest rates again to try to gain control over inflation.
(Bloomberg) — Australia’s risk of an economic downturn jumped to the highest level since the pandemic, a Bloomberg survey showed, with the Reserve Bank now expected to raise interest rates again to try to gain control over inflation.
The chances of a recession in the next 12 months climbed to 50% this month, up from 35% in May, Friday’s survey showed. Outside the first half of 2020, when Australia’s economy was driven into reverse by Covid lockdowns, the nation has avoided a recession for 32 years.
Downturns Down Under are traditionally triggered by excessive central bank tightening and a poll of 20 analysts showed a median estimate of one more RBA hike in August for a cash rate to 4.35%, a level last seen in late 2011.
“The RBA’s hawkishness and subsequent likelihood of another interest rate hike in July or August means that a real recession is a high possibility,” said Diana Mousina, deputy chief economist at AMP Capital Markets. “Australia will definitely experience a per capita recession over coming quarters, where GDP growth per person will be negative for two quarters.”
Reinforcing the rate survey, yields on Australia’s policy sensitive three-year government bond soared 46 basis points this month, while the yield curve — the gap between 10- and three-year bond futures — narrowed to as little as 10 basis points, signaling investors see a recession as all-but inevitable.
The dramatic deterioration in the outlook reflects powerful global inflation forces that are proving resilient to higher borrowing costs and forcing central banks to either keep tightening or resume hiking. Australia surprised with a rate rise on Tuesday and Canada unexpectedly resumed its campaign on Wednesday, with focus now on the Federal Reserve’s meeting next week.
The run up in bond yields has made Australia’s debt attractive as it will rally in concert with recession fears in the US and the end of the RBA’s cycle, said Amy Xie Patrick, head of income strategies at Pendal Group Ltd. in Sydney.
“The best time to buy 10-year bonds is as you approach the last hike,” said Patrick, who’s been adding to positions. “10-year bonds do better on average in the post hiking cycle ‘pause’ than the fresh cutting cycle.”
Economists reckon the RBA will begin easing in the first quarter of 2024.
Goldman Sachs Group Inc.’s Andrew Boak is among the three most hawkish economists forecasting a peak RBA rate of 4.85% – implying three more hikes — while Bloomberg Economics maintains Governor Philip Lowe is done and will hold at 4.1%. Money markets are pricing a terminal rate of just under 4.5%.
Elevated recession risk jars with Lowe’s repeated claims that Australia remains on a narrow path to a soft landing that sees the economy grow, inflation return to its 2-3% target and job gains made during the pandemic mainly preserved.
Consumer prices are currently running at around 7% — with services costs and rents surging — and the RBA forecasts they will only return to the top of the target in mid-2025.
Still, Lowe this week signaled a more hawkish stance — as the prospect of hitting the 3% target in two years’ time looks dimmer — warning that his desire to preserve employment gains doesn’t mean the RBA will tolerate prolonged price pressures.
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