Recession in Australia: How could you be affected?


Australia could be plunged into chaos with spiralling unemployment and poverty if the nation goes into recession, leading economists have warned.

One of Australia’s ‘Big Four’ banks has warned aggressive interest rate hikes could tip Australia into a recession.  

The Reserve Bank of Australia is expected to announce its sixth consecutive rate hike today, with a predicted 0.5 percentage point rise.

This would take interest rates from a record low earlier this year of 0.1 per cent to a nine-year high of 2.85 per cent.

Borrowers are already copping the steepest rate rises since 1994 with economists at CommSec, the Commonwealth Bank’s online broking arm, warning steep rate rises 28 years ago came close to tipping Australia into a recession again. 

Some economists have even predicted the cash rate could go as high as 4.2 per cent by the middle of next year.

The Reserve Bank warned the outlook for the global economy was not good, with economists saying that a recession is ‘on the cards’ for Australia.

If a recession does come to pass, then unemployment will rise rapidly, and poverty will ‘absolutely’ increase, Matt Grudnoff, Senior Economist and Director of the Economics Program at The Australia Institute told Daily Mail Australia.

Economist Ross Garnaut, a professor at the University of Melbourne, added that the recession cost would be ‘very high’ and send Aussies back to ‘long term unemployment’.

Mr Grudnoff said it could take years for Australia to bounce back from the impact of a potential recession.

Economist Ross Garnaut, who is also a professor at the University of Melbourne, said that the cost of recession would be ‘very high’ and send Aussies back to ‘long term unemployment’

If a recession does come to pass then unemployment will rise rapidly and poverty will 'absolutely' increase, Matt Grudnoff, Senior Economist and Director of the Economics Program at The Australia Institute said

If a recession does come to pass then unemployment will rise rapidly and poverty will ‘absolutely’ increase, Matt Grudnoff, Senior Economist and Director of the Economics Program at The Australia Institute said

‘With the Covid-19 pandemic recession, there was a quick bounce back, but that was an unusual one.

‘There’s no guarantee of a bounce back if we go into an interest rate recession. Unemployment would rise rapidly and it would cause a snowball effect leading to even more people losing their jobs.

‘The current recession has parallels to the 1991 recession, and it took 10 years for unemployment to recover to prior levels after that.’

He also said people would struggle to pay off their mortgage and the price of houses and rentals would fall as unemployment increases.

The economist suggested a recession could even lead to a rise in homelessness.  

Mr Garnaut added: ‘The costs of recession would be very high. People who have had a chance to enter employment in the stronger labour market conditions of the past year, and people like them, would be sent back to long-term unemployment.

‘Australia would return to an even worse place than the Dog Days in the half dozen years before the pandemic: unemployment and rising underemployment as in 2013-19, and real wages declining so even worse than the stagnation of those years.

‘The public debt position would deteriorate further, and public finances would come under great pressure.’

Fellow economist Mr Grudnoff added that the government would need to respond quickly to avoid even more disastrous problems.

The economist warned that benefits and welfare payments would need to rise, and if the government isn’t decisive in its response, there could also be a rise in people needing food banks in Australia.

‘If the government steps up, we should not see food issues, but poverty will absolutely rise. There’ll be more people in poverty in Australia because of the recession.

‘If the government doesn’t respond properly, we could see a rise in food banks and an increase in homelessness.’

However, he added that food is an essential so the fall in demand won’t be large.

More at risk are shops that don’t sell essential goods, with Mr Grudnoff noting that a decrease in people’s income could see some stores to lose their business.

Falling income from unemployment could also lead to struggles to pay energy bills, leading to scenes that could mirror those seen in places like the UK.

Benefits and welfare payments would need to rise and if the government isn't decisive in its response, there could also be a rise in people needing food banks in Australia, an economist warned

Benefits and welfare payments would need to rise and if the government isn’t decisive in its response, there could also be a rise in people needing food banks in Australia, an economist warned

Economist Mr Grudnoff added that the government would need to respond quickly to avoid even more disastrous problems like food shortages

Economist Mr Grudnoff added that the government would need to respond quickly to avoid even more disastrous problems like food shortages

However, Mr Garnaut added that Australia is in a better position than some other countries.

‘Fortunately, there is no need for recession, even if the US, UK and the EU descend into that unhappy condition,’ he said. 

‘We will avoid recession if the Reserve Bank takes its statutory responsibility to achieve Full Employment seriously in the period ahead.’

His view was echoed by Professor Percy Allan from the Institute for Public Policy & Governance at the University of Technology Sydney.

‘Australia is in a better position than the UK because our inflation is less aggressive, so our interest rate rises need not be as high to dampen the economy,’ he told Daily Mail Australia.

‘Nevertheless, our economy will slow, and unemployment will rise as higher interest rates and tighter credit bite. Whether that will amount to a recession is too early to say. If the Reserve Bank of Australia pushes its cash rate to three per cent or higher, there is a strong possibility of a recession.

‘Finally, Britain is breaking from orthodoxy under PM Truss, Her government has decided to blow out its operating deficit (largely by subsidising fuel prices and cutting taxes, especially for high-income earners) to boost economic growth. At the same time, the Bank of England is tightening credit and pushing up interest rates to slow growth so as to crush runaway inflation.

‘It’s akin to a driver putting one foot on the accelerator and the other on the brake. There is a high risk that this will cause a market panic with the pound falling further and capital fleeing the country.

‘By contrast in Australia, the government deficit is shrinking thanks to high commodity prices and still strong business conditions.’

Australian inflation grew by 6.8 per cent in the year to August but the Reserve Bank and Treasury are expecting it in 2022 to hit a 32-year high of 7.75 per cent.

Nonetheless, this is still much lower than the UK’s 9.9 per cent inflation rate for August or the U.S. level of 8.3 per cent. 

Read more at DailyMail.co.uk