Financial analyst Mark Bouris has warned that Australia is hurtling towards a recession if interest rates remain high, noting that on a “per capita” basis we are already in a deep recession. The Reserve Bank of Australia (RBA) left the cash rate at a 12-year high of 4.35% following its August meeting.
The central bank has withdrawn its inflation forecast and now expects inflation to “return to the 2% to 3% target in late 2025 and approach the midpoint in 2026.” That’s a slightly slower return to the target than previously anticipated.
Bouris said the RBA was “really concerned” by the view that Australians “could be sitting on these very high interest rates for some time, at least until 2026, compared to what many people were borrowing at a few years ago”.
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“We’re talking about the rest of ’24, all of ’25 and part of ’26. To me, that’s unrealistic. It looks like they’re setting us up for a bit of a decline,” Bouris said.
The Yellow Brick Road founder said he believed Australia would be in “big trouble” if interest rates remain at their current high levels until 2026.
“I’m talking about a big R, I’m talking about a recession,” he said.
“But more importantly, I’m talking about a recession when it comes to the workforce. It’s a recession caused by unemployment.
“That means unemployment numbers are going to go way beyond where they are now, way beyond 4 per cent. That bothers me and it should bother every Australian.”
The unemployment rate rose to 4.1 percent in June, from 4 percent the previous month, despite the creation of approximately 50,000 new jobs.
RBA governor Michele Bullock said she and her board “do not believe” Australia is heading into recession.
“We still believe we’re on that tight end. Having said that, we’re data-dependent and as we’ve said in the statement on monetary policy, there are a number of things that could cause the economy to slow much faster and inflation to fall much faster than we expect,” Bullock said.
“We need to be alert to these things, and if they happen, interest rate cuts will be on the agenda.”
He said the board ruled out the possibility of cutting interest rates in 2024.
Australia in per capita recession
Bouris said Australia was “absolutely” already in a recession on a per capita basis, which is a measure of economic activity per capita.
The latest national accounts showed GDP per capita falling by 0.4% in the first three months of 2024 and by 1.3% last year. That was the fifth consecutive quarterly decline and the biggest annual decline since the 1990s recession.
GDP rose 0.1% in the March quarter, up just 1.1% year-on-year. Barring the pandemic, this is the weakest result in three decades.
A recession is defined as two consecutive quarters of negative growth.
What does the recession mean for Australia?
AMP Chief Economist Shane Oliver said the risk of a recession in Australia was 50 per cent.
“A recession usually results in higher unemployment; the recessions of the early 1980s and 1990s saw a 5 percent increase, less job security, lower wage bargaining power, falling living standards and lower confidence,” Oliver said.
“Recessions eventually mean lower growth in the cost of living and often lead to lower levels of immigration and fewer households forming, which can reduce pressure on rents and house prices.”
Oliver said recessions in Australia were often associated with a “bear market in stocks”, meaning declines of 20 per cent or more as profits plummeted.
Oliver said the RBA should now “consider a rate cut” because there was a risk of unemployment being much higher and inflation remaining below target.
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