Australia's top economists say there is a 50% chance that persistent inflation will force the Reserve Bank of Australia (RBA) to raise interest rates further, triggering a recession.
According to the Australian Financial Review, Judo Bank economic adviser Warren Hogan predicts that even if there is no recession, the economic deterioration in the next two years could lead to more than 100,000 Australians losing their jobs.
"With growth stalling, there could be a technical recession," Hogan said Friday, "and we need to work to keep the unemployment rate below 5 percent."
(Image source: SkyNews)
He predicted that the Reserve Bank would raise the official cash rate of 4.35% at least two more times to 4.85%. In addition, there may also be a risk of a third rate hike if the federal and state government's stimulus measures lead to a further rise in inflation.
A technical recession is defined as six consecutive months of contraction in economic output.
In the first quarter of this year, Australia's economic growth almost stagnated, at just 0.1%, and for the whole year, it grew by 1.1%. Aside from the pandemic, this is the slowest annual rate of growth since the recession of the early 1990s.
The annual inflation rate for May, released this week, rose to 4% from 3.6% in April, significantly increasing the likelihood that the Albanese government will raise interest rates towards the end of its first term.
From next Monday, $23 billion in annual tax cuts will flow into the economy, with federal and state governments also expanding budget spending.
Economic experts say the stimulus will increase upward pressure on inflation and interest rates.
Richard Holden, professor of economics at UNSW, believes that the probability of a recession is 50 to 60 percent.
Former Reserve Bank economist Jonathan Kearns predicts recession risks ranging from 30% to nearly 60%, based on models of economic variables such as unemployment, inflation and bond yields. But on a per capita basis, Kearns said Australians were already experiencing a slight recession.
Jonathan Kearns（图片来源：AFR）
Saul Eslake, an independent economist, said that if the Reserve Bank does not raise interest rates, the probability of a recession is 10%; If interest rates are raised, the probability of a recession is 50%.
He believes that there could be multiple rate hikes between the second half of this year and mid-2025, "which is very bad for governments seeking re-election." ”
Kearns, chief economist at Challenger Investment Management, predicts that the unemployment rate could still rise even if official interest rates fall, and he predicts that the unemployment rate will reach 4.7%.
Rising unemployment is likely to increase political pressure to cut immigration, with the government expecting around 260,000 immigrants for next fiscal year, with opposition leader Peter Dutton promising further cuts. While Holden's view of the unemployment rate is not as pessimistic as that of Hogan or Kearns, who predicts it will reach around 4.3%, he points to airlines, hotels and restaurants, which have been hit hardest during the COVID-19 pandemic, to bear the brunt of the recession.
"The hospitality industry is likely to be the most affected because people tend to cut discretionary spending on restaurants, travel, etc.," Holden said.
Reserve Bank Governor Michele Bullock said at a press conference this month that while the board is reluctant to raise the cash rate at 4.35%, the Reserve Bank may have to act if inflation is significantly higher than the bank's forecast.
Michele Bullock（图片来源：AFR）
She said the "narrow road" to a soft landing for the economy was becoming "narrower" and repeatedly said the board was "wary" of upside risks to inflation.
"We need a lot of things to get inflation down to the 2 to 3 percent target range."
Warwick McKibbin, a former reserve bank board member, has been arguing since November that the Reserve Bank cash rate needs to rise to about 5% to tame inflation.
"Who would have thought that now that inflation has not come down, interest rates should be higher?"
McKibbin wrote sarcastically on social media this week.