Recession a highly probable outcome

Australian economy recession

The Australian economy is most likely headed for a recession due to increasing levels of inflation and the actions of central banks to fight them.

A portfolio manager has predicted the Australian economy is headed for recession due to the actions of central banks to reduce the high levels of inflation prevailing currently, but suggested it will not be severe.

“Our base case is [for] a recession. We think it’s going to be relatively mild at this stage, but we do know that central banks are focusing on fighting inflation where the growth outlook and recession are secondary considerations,” Schroders fixed income and multi-asset portfolio manager Mik Kase noted.

“We saw [US Federal Reserve chair] Jerome Powell state basically they need to kill inflation and if that’s at the expense of the economy, then effectively so be it.

“Our recessionary indicators are highlighting a heightened risk of recession when we look across all of the factors that we map and as a result we’re expecting a drop in growth with a recession most likely.

“Now the depth of that recession in our view currently is likely to be relatively shallow, but the challenge really is if central banks have to continue to hike rates and if inflation isn’t controlled, then the impact of that on growth moving forward would mean a higher probability of a deeper recession.”

However, Kase indicated he is not of the belief official interest rates will increase much further from their current levels.

“If we’re not [at the peak], I suspect we’re fairly close. When you have a look, for example, at the US Federal Reserve, the questions really are how fast they are going [to move], how high [they are going to go] and how long are they going to stay there,” he said.

The answers, he acknowledged, will depend on how persistent the high levels of inflation continue to be.

“The challenge we know with inflation is that when it moves through 8 per cent, as we’ve seen in history, it tends to stay higher for longer. As a result, if inflation does tend to be sticky and become imbedded into the system, particularly with the current tension in the labour market, and if we see inflation roll over but still settle at a rate higher than is comfortable for central banks, then we will expect them to basically continue the tightening cycle,” he said.


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