Australian economy on the brink of recession

At the moment, the Australian economy feels like an out-of-control car.

Interest rates are rising faster and faster, the jobs market is surprisingly strong, economic growth is slowing, inflation is soaring but appears to be on a low trajectory, and many families are struggling with rising costs of living.

Savers are finally getting some return on their money in the bank, but those with really big loans are struggling, mortgage stress levels are very high, but actual defaults are still at historically low levels.

Oh, and the housing rental market is tight as a drum, with smaller vacancy rates, higher rents starting to level off a bit and property prices seeming to have halted their temporary rally as interest rates start to bite.

Consumers going on strike

Consumer confidence has fallen sharply and real consumer spending on non-essential goods appears to be falling fast, with profits at electronics and furniture retailer Harvey Norman falling 25%.

The Westpac-Melbourne Institute’s leading index, a forward-looking indicator of economic growth, has hit its lowest level since the Covid-19 pandemic.

After ten negative results in a row, the six-month annual growth rate in the index, which indicates the pace of economic activity relative to the trend three to nine months into the future, fell to negative 1.09% from negative 0.78% in May. April.

All this led Westpac to cut its 2023 growth forecast to 0.6%, down from the previous and already bleak figure of 1% growth.

What could happen next?

This plays well into the car analogy that is out of our control, but does little to prepare us all for what might happen next.

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It’s clear that the economy is weakening, slowing, and incredibly vulnerable to offshore shocks, but with so many moving parts and pressure points, what happens from here?

Well, you’d have to say that Australia’s chances of avoiding a somewhat famous economic recession after the global financial crisis (GFC) it self-inflicted to some degree are unlikely despite the strength.

The narrow path is now a bush path

The global economy is slowing down and the RBI’s „short cut” to a soft landing is looking more bushy by the day.

Obviously, there are plenty of economic indicators you can look to for guidance, but for me the jobs market is one to watch very closely.

While employment remains very strong amid labor shortages and persistent supply chain issues, financial pressures within households and record levels of emigration will be a major test.

Side hustles go mainstream

The Bureau of Statistics continues to record an increase in the number of people working multiple jobs in line with rising prices and according to Finder data an incredible 7% of Australians now take on a second job to bring in extra cash as they struggle. To cope with rising food prices and housing prices.

Add in job-seeking immigrants and the supply side of the jobs equation looks more than enough to cover any shortages and may be enough to reduce wage pressures and increase unemployment.

Sectors of the economy such as property and retail are no longer performing well, and the ingredients for a weakening in employment seem inevitable.

Will China come to the rescue?

If Australia is to „luck” back into its enviable record of masterfully overcoming two consecutive quarters of recession-defining negative growth, the savior will once again be China.

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Unlike us, China has been hit by falling prices with a weak economy, and the magic wand of economic stimulus could once again be waved at the Middle Kingdom.

As we all know, when China pushes, we benefit from Australia’s mineral and agricultural exports finding a much happier home on the many ships that sail to major Chinese ports.

After China helped us out so well with the GFC, that might be too much to believe, but when you look around, there aren’t many other positives to believe in.

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