Saturday, March 25, 2023

Australia's probability of recession increases when rates rise further

The probability of a recession in the US$1.5 trillion (RM6.7 trillion) economy is decreasing, according to analysts and the money markets, as a result of Reserve Bank of Australia (RBA) chief Philip Lowe's forecast of future interest rate increases.

A Bloomberg survey revealed that the likelihood of a downturn over the following 12 months has increased from one-in-four late last year, when Lowe hinted at a rate halt. In contrast, the possibility of a recession in the US has started to decrease.

Once the RBA became concerned about an increase in inflation, it took a hawkish turn, and market participants priced in four more rate increases.

There will now be one more rate increase than that for the US Federal Reserve.

Two months after the Fed, in May, the RBA started its tightening cycle. Since then, it has advanced more slowly.

Lowe argued that Australia stood out from its international counterparts and that as supply chains untangled, inflation would decline. The governor claimed that the RBA's objective was to get the economy ready for a smooth landing.

But, as prices were supported by strong domestic demand in the final three months of 2022, inflation rocketed to a 32-year high.

As Lowe accepted that Australia had the same problems as the rest of the world, his message changed. After the RBA had contemplated a pause in December, Carney surprised markets in February by raising rates and sending a hawkish message.

The longer central banks put off taking robust action against inflation, the smaller the path between inflation control and recession gets, according to Stephen Miller, a GSFM investment strategist based in Sydney.

The route has been far narrower than it needs to be because of the RBA's uncertainty through 2022.

In October, when the Fed was still raising rates in 75 basis-point increments, the RBA was one of the first central banks to switch to quarter-point increases.

Lowe intended to protect some of those gains at a time when Australian unemployment was close to a 50-year low and job openings were at all-time highs.

Miller opined that rather than now, when unemployment is on the rise and the economy has lost jobs in the last two reports, that might have been a better time to push harder with rate hikes.

Australia's probability of recession increases when rates rise further

The outlook for the RBA is deteriorating, with consumer confidence plunging to nearly recessionary levels, which raises expectations for more forceful RBA action.

But, despite the Fed raising rates by 4.25 percentage points as opposed to the RBA's 3.25 percentage points, US consumers have proven to be more robust.

According to Andrew Canobi, director of Australian fixed income at Franklin Templeton Investment Australia in Melbourne, the confidence surveys are beginning to be "supported by rising anecdotes from some of the corporates."

"Domino's Pizza is one example, which informs us that customers are now choosing to come and pick up their pizza instead of having it delivered to save money. —Bloomberg

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Australia's probability of recession increases when rates rise further