A year ago, we forecast a high risk of recession in Australia as it became self-evident that the post-Covid spending boom was unsustainable and could only inevitably lead to one heck of a hangover.
Australia is headed for recession due to the economic hangover effect, weakened stock market prices and now fast falling property prices. All on top of a highly uncertain world and alongside the part causes of inflation and belated overly-aggressive rate hikes.
It is a powerful domestic mix with severe global uncertainty as a backdrop.
Australians tend to be overly optimistic, in the same way the British tend to be overly pessimistic. As a nation of “she’ll be right mate”, we are sometimes slow to recognise the process of decay, the rotting of the foundations from inflation in particular, until it is too late.
This is the case now. Which is why the Reserve Bank of Australia will likely continue to raise interest rates in 25-point increments at its next two to three meetings.
This week’s inflation number is likely to be deeply concerning as it stretches toward 8%. Some may like to think that will be the top, but lingering inflation even above 5% is disastrous for any economy.
It is way too soon to suggest the RBA will stop hiking. Even if it were to do so, the downside momentum now building in the Australian economy appears unstoppable.
The outcome for markets will be a taking of the wind out of the sail of equities, though many will spin this as a cause for celebration as inflation could not possibly go higher?
There is a risk to that view as global Oil prices are again climbing rapidly and could move back above $100 a barrel this year.
The damage to the economy, both from high inflation and RBA interest rates will continue through 2023. Posing a significant threat to future corporate earnings.
The Australian dollar appears keen to rally on the inflation number, arguing it will mean higher rates, but this ignores the fundamental reality of a fast-faltering economy. One likely to experience negative growth and high inflation simultaneously. When looked at this way, the argument for selling the Australian dollar could not be any more exciting for the bears.
Suggest extreme caution, as stocks and the Aussie continue to stretch skywards. It is most likely an unsustainable situation.
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