Recession risk ‘now very high’: Shane Oliver

On Friday (23 June), AMP’s chief economist Shane Oliver outlined that the likelihood of an Australian recession is now “very high”, as the economy slows.

In his weekly economic and market report, Mr Oliver reiterated his position that the Reserve Bank of Australia’s rate-hiking cycle has now “gone too far” and could risk a recession — suggesting that the risk of recession is now “very high at around 50 per cent”.

Mr Oliver explained: “Our assessment remains that the RBA has already done enough to slow the economy and bring inflation back to target and we are seeing clear evidence of slowing demand in terms of falling real retail sales, falling building approvals, slowing plans for growth in business investment, slowing GDP growth, and early indications of a slowing jobs market.

“As such, we think the RBA should leave rates on hold for several months and allow more time to assess the impact of past rate hikes.”

Indeed, Mr Oliver has been calling for a pause to the cash rate for the last few months, stating in May that he didn’t believe the central bank was “allowing enough time to let the lagged impact of past hikes show up”.

In his weekly report on Friday (23 June), the AMP economist noted that the RBA’s tightening bias, consistently high inflation, poor productivity growth, and “the rising impetus to wages growth” (particularly flowing from the higher-than-expected minimum and award wage increases as well as increasing uses of wage increases tied to current, rather than target, inflation) “all point to the RBA raising rates again”.

“Reflecting this, we are allowing for another 0.25 per cent hike in either July or August and another one in September taking the cash rate to 4.6 per cent,” he said.

According to Mr Oliver, the release of the Monthly Consumer Price Index Indicator for May (released on Wednesday, 28 June), will have an influence on when the RBA hikes rates.

He said he expects the monthly CPI data to show a “sharp fall back to 6.0 per cent after April’s rebound to 6.8 per cent” based on the drop in petrol prices in May and “the base effect of a 0.7 per cent monthly increase in May last year dropping out of the annual calculation”.

Mr Oliver continued: “This could create space for the RBA to skip another rate hike in July and wait till August before moving again. Note, however, that the monthly Inflation Indicator is very volatile and is yet to really prove its usefulness beyond creating more noise for money market traders and something for economists and others to commentate on.”

He said that, as a result, he believes the risk of recession is now “very high”.

“Consumer spending is almost certain to start going backwards later this year and into next year as the 4 per cent plus cash rate will push debt servicing costs into record territory as a share of household income,” he said.

The AMP economist added that the RBA’s own analysis has estimated that 15 per cent of households with a variable rate mortgage (equating to around 1 million people) will be cash flow negative by year end, but that this was based on a cash rate of 3.75 per cent cash rate “and we are now well beyond this”.

He estimated that “the next few months are likely to be rough” for investment markets, given high recession and earnings risks, uncertainty around US banks, and “poor seasonality out to around September/October”.

“We remain of the view that shares will do okay on a 12-month view as central banks ease up as inflation cools — with the ongoing decline in our US Pipeline Inflation Indicator being supportive in this regard — but the next few months are likely to be rough,” Mr Oliver concluded.

[Related: Major banks agree cash rate peak is 4.6%]