Is Australia Headed for Recession? The RBA and the Credit Conundrum ...

“May you live in interesting times.” – Purported Chinese curse with no attributable provenance.

Whilst not Confucian in origin, this statement has great resonance with the current climate here in Australia. Perhaps the Chinese have something to teach us about our economy after all? Our nation has survived bushfires, floods, and a global pandemic to now be paying the bill economically for this litany of disasters. The list makes for, almost, Biblical reading with echoes of the Old Testament curses handed down upon Egypt by the God of enslaved and exiled Jewish people. Inflation and the dramatically rising cost of living may well be the worst of all these plagues and pestilent misfortunes to strike our lucky country. Nobody escapes these woes of the current account, as the wheels of the market economy slow under the harsh brakes of RBA monetary policy. Is Australia headed for recession? The RBA and the credit conundrum in 2022 makes for very interesting reading.

The Australian Economy in 2022/23

Economics is not an exact science, no matter how many mathematical equations and algorithms they include in their forecasting. The Ancient Romans used to gut animals and the Haruspex would read the entrails to predict the future. Economists are less inclined to get their hands so dirty but a level of interpretive guesswork remains in their forecasting. Philip Lowe, the Governor of the RBA, is, now, infamous for his bold predictions about interest rates not rising until 2024. Of course, we have seen some of the most extreme and rapid increases in Australian interest rates in 2022. It must be mentioned that interest rates here and globally are coming off a historically low base. However, Australians of the last decade and a half have known nothing else and it has hit them hard where it hurts most.

“The Reserve Bank has raised its key interest rate for a fifth month in a row to 2.35%, extending Australia’s fastest pace of increases in borrowing costs in almost three decades.” - Hannam, Sept 2022

Interest rates affect us all whether you have a bank loan or not because increased costs for money and credit filters down throughout the economy. Rents go up because monthly repayments on money borrowed to buy property have gone up. The market price resets at a higher level and all landlords cash in on the motza, whether they have increased costs or not. In fact, economists are reporting that the rental market is offering the best return on investment currently available. Prices go up across the board because businesses are recouping their increased expenses from the price of credit and the chain reaction of price increases everywhere.

Record Profits For Corporations

Corporate Australia is recording record profits on the back of the high inflation spiral here and around the globe.

“Half yearly profits for all companies together had almost doubled to $US55.2 billion ($79.6 billion), up from $US28.7 billion for the same period last year...” - Taylor, August 2022

The wealthy, those who can afford to be shareholders, are pocketing lots whilst those struggling are being screwed by rising costs everywhere they turn. Wages, meanwhile, are taking a dive as they fail to keep pace with an inflation rate of 6.1%, as of the June quarter in 2022. Stagnant wage growth in Australia for a couple of decades has meant that Australian workers are falling behind in terms of what their pay packets can provide. Higher inflation is widely tipped by most economists and the RBA for the next quarter and beyond. The consequence of this will mean more people forced to borrow money to meet the cost of living. Credit costs are being raised by the RBA in a bid to dampen demand and stop the inflation spiral. This is what I call the credit conundrum facing Australians in 2022 and in the short to medium term future.

“There are three kinds of people: the haves, the have-nots, and the have-not-paid-for-what-they-haves.” - Earl Wilson

The RBA Has One Lever To Pull

The levers used to control the economy are not the finely tooled instruments of a surgeon, no, they are more akin to a sledgehammer cracking the lives of all those caught in the wrong place at this time. Those in the property market who cannot afford to meet the rapidly increasing repayments on their home loans are prime examples.

“ANZ this week tipped prices across the capital cities to fall 18 per cent from peak to trough, with the largest declines forecast for Sydney (20 per cent), Melbourne (17 per cent) and Canberra (16 per cent). Prices in Adelaide, which are still on the rise, were also expected to fall 17 per cent next year.” - Burke, August 2022

Falling Property Prices

Decreasing property values and rising interest rates puts vulnerable investors and home owners in a vicious cycle with a nasty outcome of loss and broken dreams on the cards. Australia, ‘the land of the fair go’, is rapidly headed toward being too expensive for many of its denizens to live in. The new Labor government is faced with a federal economy in massive debt following the pandemic, spiralling interest rates, and expanding sections of the population headed for economic woes. The only good news is the record low unemployment rate, as businesses struggle to find applicants for jobs. Yes, we have a labour shortage within the Australian economy right now. We have just had the Jobs and Skills Summit, where employers, unions, and other stake holders were brought together to find solutions for endemic issues within this important part of the economy. Australia needs to reinvigorate the training sector after years of neglect by previous governments. The privatisation of skills training has not worked and the TAFE sector must be rebuilt with greater investment and new ideas. Skilled migration has a place but it is not the instant panacea that some in business reckon it is. If we do not train our own citizens effectively for the jobs of today and the future we are condemning our children to endless financial insecurity going forward.

“The only man who sticks closer to you in adversity than a friend is a creditor.” - Unknown

The Financial Outlook For Australia

Saxo Bank CFO, Steen Jakobsen says, “the RBA has no clue about what the future holds!” (ABC News, 13th Sept 2022)

Jakobsen states that the global causes of high inflation are negative supply shocks in the aggregate supply of tangibles. The global pandemic and the war in Ukraine have stemmed global supply by breaking down supply chains. There were signs of the global economy’s vulnerability to shocks of these nature, according to Agustin Carstens.

“Low productivity growth was a key warning sign. In advanced economies, it plunged during the Great Financial Crisis (GFC) and never fully recovered, part of a longer decline going back at least to the late 1990s (Graph 2). In emerging market economies, the productivity boost from integration into global networks and structural reforms proved to be fleeting. The post-GFC slowdown has been the steepest and most prolonged of the past three decades." - Carstens, August 2022

Is Australia headed for recession? What actually defines a recession? A technical recession is indicated by two consecutive quarters of negative growth in real GDP. Of course, things can be bad in the real world without reaching the statistical conditions defined for a technical recession. Property prices in the two main cities are falling amid the rapid rises in interest rates, which for the Australian economy is a clear sign of pain ahead. The local share market is down, as are the stock markets in the US, in response to the high inflation figures reported in both economies. According to charts provided by Alan Kohler, on the ABC, Australia’s labour productivity growth is the lowest in 60 years. Economies in the free market capitalist system regularly exhibit boom to bust cycles. These shifts are triggered by a variety of conditions and circumstances.

Learnings From The Past

Historically, Australia has had recessions in 1974-1975; 1982-1983; and 1991-1992. These were caused by global oil prices in the 1970s stimulating ‘stagflation’, where inflation peaked at 18% and unemployment at 5.5%. In the 1980s, tighter monetary policy globally to battle entrenched inflation and drought locally produced a recession with unemployment peaking at 10.5%. In the 1990s, RBA high interest rates reached 18% and provoked the recession we ‘had to have’, according to then PM Paul Keating.

There are worse economic conditions and these are called ‘depressions’. Australia experienced The Great Depression in the 1930s and a Depression in the 1890s. These times were by far the worst in terms of social upheavals and suffering for Australians living through them. Runs on banks and massive levels of unemployment meant people going without food, work, and causing homelessness. The Australian Labor Party (ALP) was born out of the crisis of the 1890s Depression, as was Federation itself.

The Global Financial Crisis (GFC) in 2008-2009 was our most recent experience of a severe economic downturn. Corporate greed and lack of regulation in the banking sector caused the GFC, with merchant banks bringing down a raft of financial institutions and corporate entities across the globe. Large job losses across the economy resulted and Australia was fortunate not to suffer more due to its sound economy and buoyant trade with China.

The obvious point of difference in the economy right now is the historically low unemployment rate. All previous recessions and depressions have been accompanied by high levels of unemployment. The labour shortage has been caused by the departure of around a million people returning to their home countries during the Coronavirus pandemic and the slow return to Australia of international students and overseas travellers more generally. If, however, the hard braking by the RBA via high interest rates stops demand to the extent it seriously dampens domestic trade, then, we will begin to see job losses in these sectors. Similarly, if we invite in great swathes of skilled migrants and their families into a slowing economy the labour shortage may quickly evaporate.

“The rise in US inflation to 8.3 per cent in the year to August led to warnings of interest rate hikes there, sending shockwaves through global markets as investors worried that could spark a recession in the world’s largest economy. Higher rates in the US could weaken the Australian-US exchange rate, which in turn could raise the cost of imports and further add to inflation here.” - Yeates, September 2022

Why Is Wage Growth At Record Lows?

“The Fraser and Howard governments in the 1970s and 1990s ramped up the pressure by banning industrial action by unions and attacking their membership through non-union agreements. Unions were made out to be the bad guys in continuous attacks on their character in the public eye.” - SpeakTruth, September 2022

“Debts are like children – begot with pleasure, but brought forth with pain.” - Moliere

What has caused prolonged low wage growth in Australia? Government and RBA policies have directly contributed to negative growth in wages. The dismantling of the union movement’s influence and power has combined with economic policies to void any weight once held by workers in Australia.

Workers were promised they would get more money via enterprise bargaining and in reality were stiffed over time and left toothless in negotiations. Business and corporations have won the economic tussle and Australian workers have been left wondering why their buying power has gone backwards in real terms.

The Credit Conundrum

More Australians are, and soon will be, borrowing money to stay afloat in this time of high inflation. High interest rates and the rising cost of living will see them struggle to meet repayments and find them falling deeper into debt. Older Australians are reporting concerns about meeting the cost of living, which has been revealed in a recent study. (Martin, August 2022)

Many individuals have already dipped into savings and even their super during pandemic lockdowns and the host of challenges faced over the last few years. The worst, however, may be yet to come. A recession will see people lose working hours and, perhaps, jobs in the longer term. If the RBA goes too hard to achieve a stranglehold on inflation Australians will experience real pain. If consumer credit laws are too lax in certain parts of the finance sector, then, more people will be suffering sooner. The credit conundrum is that more Australians will need credit and yet more of them will struggle to repay it at the high interest rates defined by the RBA.

“Debt is the slavery of the free.” - Publilius Syrus

It is no big call to predict that more Australians will soon be in need of sound financial and legal advice regarding consumer credit laws in this country. Those businesses that make their money from extending credit are always quick to sign individuals up to contracts for loans and higher purchase. Recessions are boom times for lenders, as desperation feeds their ledgers with plenty of prime candidates for credit. Remember to check the fine print before signing your name to any contract. If, however, you do find yourself among those seeking credit repair for a damaged credit rating and reputation – all may not be lost. In some instances, where mistakes have been made, the deletion of negative listings on your credit file can be facilitated. Credit worthiness can be restored in these cases, where misleading and incorrect listings have occurred. A good credit lawyer can help you recognise these situations. Understanding that credit reporting is governed by The Privacy Act 1988 (Cth) means that qualified legal expertise can be of immense assistance in these circumstances. The No Win No Fee basis makes the economics sound as well.

Understanding how long information and judgements remain on your credit file is another aspect with which your credit lawyer can help you. Remember that all is not lost until you have explored all avenues within your rights as an Australian consumer under the law.

References

Kate Burke, For one type of home, the property downturn is deeper than the rest, SMH, 18th August 2022.

Peter Hannam, RBA interest rates: Reserve Bank lifts official cash rate by 50 basis points to 1.85%, The Guardian, 2nd August 2022, Viewed 18th August 2022.

ABS, Consumer Price Index, Australia, https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/latest-release Viewed 14th September 2022.

Agustin Carstens, A story of tailwinds and headwinds: Aggregate supply and macroeconomic stabilisation, Jackson Hole Economic Symposium, 26th August 2022, Viewed 15th September 2022.

Aust Govt, The Treasury, Jobs and Skills Summit, https://treasury.gov.au/employment-whitepaper/jobs-summit Viewed 14th September 2022.

Alan Kohler, ABC News, The Kohler Report, https://www.abc.net.au/news/2022-09-01/thursday-finance-with-alan-kohler/14039862 Viewed 15th September 2022.

Mina Martin, Inflation a bigger concern for Aussies than mortgage debt – study, August 2022, https://www.brokernews.com.au/news/breaking-news/inflation-a-bigger-concern-for-aussies-than-mortgage-debt--study-280724.aspx Viewed 15th September 2022.

RBA, Recession, https://www.rba.gov.au/education/resources/explainers/recession.html Viewed 12th September 2022.

SpeakTruth, Why do we have record low wage growth in Australia? https://www.midasword.com.au/why-do-we-have-record-low-wage-growth-in-australia/ Viewed 13th September 2022.

David Taylor, ABC News, Australia could see recession followed by strong recovery next year, experts say, https://www.abc.net.au/news/2022-07-01/recession-possible-in-australia-next-year/101202044 Viewed 13th September 2022.

David Taylor, ABC News, Corporations’ profits soaring as inflation skyrockets and real wages fall, report reveals, https://www.abc.net.au/news/2022-08-03/skyrocketing-inflation-falling-wages-profits-grow/101297376 Viewed 15th September 2022.

Clancy Yeates, Surging US inflation sparks fears of recession, SMH, 14th September 2022, Viewed 15th September 2022.