Economists on recession watch

  • By Kate Weber

Speaking at the recent Breakfast with the Economists event  top economists shared predications on the likelihood of a recession hitting Australian shores.  

Chief economist at S&P Global Ratings, Paul Gruenwald said on a global scale the markets will continue to remain lower for longer. 

The United States will struggle to regain market confidence, however he stated there is a “big weight” on the yield curve distorted by quantitative easing. 

From an Australian perspective, Felicity Emmett from ANZ said to expect one more interest rate cut as outlined in the forward guidance from Governor of the Reserve Bank of Australia, Philip Lowe who indicated that interest rates should continue to stay low. 

“The risks around that though, is we could see more cuts and we could see next year another cut of around 50 basis points.

“In terms of a recession, there is enough stimulus in the economy to keep it going, public sector spending is really helping to support the economy. 

“So, a recession is certainly not our central case and if we did see one it would be driven by the international backdrop [China and the United States trade relations] and I think we'd probably put a probability of somewhere about 20 per cent.”

Chief economist and senior relationship manager at RBC, Su-Lin Ong followed with similar sentiments stating some challenges could appear, but the Australian dollar is proving strong. 

“There are a number of challenges but there is a reasonable amount of stimulus in the system. 

“We expect two more rate cuts and we are looking for the cash rate to get half a percent early next year so there'll be more stimulus coming through there," Ong said. 

“The Aussie dollar is also helping on the competitive side, that will also be supportive of growth. 

“There are obviously a bunch of risks and we're always mindful that it's the external sector and the global backdrop that is a real threat, but domestically despite the challenges there is enough stimulus at least over the next 12 months to keep growth going.” 

However, Sally Auld from JP Morgan stated there was some worry in the markets due to probability models forecast. 

“We’re not forecasting a recession but we're becoming increasingly worried that’s where we end up.”  

“We think the RBA will cut another 50 basis points so that together with the fiscal stimulus should keep growth ok, the thing that worries me is the US run a whole suite of models around to forecast the probability of recession in the next twelve months in the US and that's sitting at 45 percent. 

“That's close enough to 50 percent that you might start to worry a little bit. 

“If there's a 45 percent chance of a recession in the US then there's a 40 percent chance of a recession in Australia because when the next global recession comes, we will not duck and weave, we will likely have the last tumble.

“That worries me a little bit. 

However, Auld said remained optimistic Australia could pull through. 

“We do have the scope for fiscal easing whether we've got the willingness, we’ll see. 

“Often when looking at Australia's economic history, the periods of economic reform and had and usually have come off big recessions. 

“Maybe we're in the unfortunate situation where things have to get worse before they get better.”

Energy reforms, skills developments and continuing to strengthen Australian infrastructure will help soft the blow of a recession according to Ong. 

Should these fail to have meaningful investment then Australia will likely be unable to escape a downturn. 

“If the globe goes into recession Australia's got few levers to pull. But it's unlikely to be able to escape as it has done in the past,” Ong said.