The Times Australia
The Times World News

.

Global recession looks likely. Even if Australia escapes it, we are in for a bad couple of years

  • Written by Steven Hamilton, Visiting Fellow, Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National University
Global recession looks likely. Even if Australia escapes it, we are in for a bad couple of years

Economics is confusing at the best of times. But, at the moment, it’s downright counter-intuitive.

Inflation is at its highest in decades, and we’re feeling the pain of the lower real wages that brings. Meanwhile, unemployment is its lowest in half a century, with virtually anyone who wants a job able to get one.

Interest rates are climbing sharply. Home prices are sliding, yet rents are taking off. The United Kingdom is on the brink of financial crisis. Talk of a global recession is everywhere.

Even if you don’t much mind what’s happening (you mightn’t be much affected or you might in fact be benefiting in some way), you’re likely finding it hard to come to grips with it all. Certainly, our policymakers are.

It began with the pandemic

The first thing to understand about what’s happening is that it can’t be divorced from the pandemic.

Two years ago, early in the pandemic, Australia went into recession for the first time in 30 years.

And what an unusual recession it was. It was sharp, but rather than following the collapse of a speculative bubble or a downturn in the business cycle, it followed years of perfectly sustainable, if weak, economic performance.

It’s worth recalling a few things. Australia handled the public health side of the pandemic better than most. That meant that, although sharp, the collapse in economic activity was less severe than decision makers anticipated.

Even though generally still employed, Australians were much less able to spend. International travel, dining out, and going out had to be put on hold.

At the same time, Australia put in place one of the largest fiscal and monetary support programs in the world. Interest rates were set to zero and the Reserve Bank used unconventional tools to flood financial markets with money.

JobKeeper[1] and the cash-flow boost for businesses, along with the JobSeeker supplement[2] (and loosened eligibility conditions), cash transfers for government benefit recipients, and A$38 billion in superannuation withdrawals[3] constituted the largest fiscal stimulus in Australian history.

Support that couldn’t be spent

Households and businesses were awash with cash during the pandemic – but with not many places to spend it. Much of that spending was simply delayed.

Without the benefit of hindsight, this shouldn’t be viewed as a mistake. As Australia’s leading monetary economist, Professor Bruce Preston of the University of Melbourne, put it, we took out prudent insurance.

It had been 100 years since the last pandemic of this scale, and it was impossible to tell just how bad things would get. It was safer to do too much than too little.

But just as insurance comes with a premium, so too does too much stimulus. Once the economy reopened, too much money chasing too few goods and services would only end in one way: higher prices.

This has been exacerbated by supply chain constraints, some simply the result of switching the global economy off and on and others resulting from the effect of Russia’s invasion of Ukraine on global commodity prices.

Then the floodgates opened

The trouble with high inflation is that we can’t count on it solving itself. It is true that higher prices cut real wages, choking off spending and helping dampen prices. But it is also true that they can feed higher inflation expectations, which do the opposite.

If people expect high inflation they’re more likely to bring forward purchases simply because they expect prices to rise. And workers demand higher wages, and businesses higher prices, in anticipation of the higher prices they will themselves face in future.

In this way, inflation can become self-reinforcing and thus harder to arrest. That’s why monetary (interest rate) policy and fiscal (government tax and spending) policy have been rapidly tightened across the world – to ensure a temporary episode of high inflation doesn’t become entrenched.

It looks as if this has already occurred in the United States, the United Kingdom, and Europe. It’s not yet clear whether it will happen in Australia.

The loose monetary policy across the world through the 1970s provides a lesson for what not to do in a situation like this. It took a decade, well into the 1980s, to get inflation under control.

Nothing is worse for real wages and living standards than high inflation. Ask those living in Argentina[4] and Turkey[5] where purchasing power is sinking.

Ideally, policymakers would have seen inflation pressures building and begun to tighten settings sooner and more gradually. The later the reaction, the sharper it has to be – and the more damaging the economic consequences.

Australia’s Reserve Bank was slow off the mark, months behind the Reserve Bank of New Zealand and a month behind the US Federal Reserve. It’s hard not to see that as complacent.

Read more: The RBA has got a lot right, but there's still a case for an inquiry[6]

And Australia’s federal government continued to hold its foot on the gas long after the bank started to hit the brakes – with massive additional stimulus irresponsibly committed to by both sides of politics during the May election.

And we’ve seen no action yet from our new government on inflation. It is hard to tell what it is waiting for – perhaps next week’s budget.

Its messaging isn’t helping. The treasurer’s constant references to a “dangerous[7]” global economy is irresponsible at a time of fragility – he needs to remember he is the treasurer now - his words can have a real effect on outcomes.

And the Reserve Bank’s traditionally poor communication hasn’t gotten any better. It pivoted at this month’s board meeting, halving the rate of increase in interest rates, but failed to clearly explain the reasoning in its accompanying statement[8].

Recession or not, it’ll be a bad couple of years

The word “recession” is unhelpfully binary. Economists don’t even agree on its definition[9]. In an unusual situation like a pandemic, or post-pandemic, its meaning is even emptier.

One thing we do know is that global economic growth, including growth in Australia, will be far slower over the coming two years than we expected mere months ago.

We overestimated the global economy’s ability to smoothly rebound from the pandemic. And we didn’t anticipate Russia’s invasion of Ukraine.

Read more: Global recession is increasingly likely. Here's how Australia could escape[10]

Australia can be expected to fare better than most countries. It is less exposed to the energy price shocks than Europe and the United Kingdom, and to some degree, being a big energy exporter, benefits from high prices.

But there is a lot of uncertainty about China – Australia’s biggest export customer. A sharp downturn there, precipitated by something like a real estate collapse, would pose a serious risk to the Australian economy.

It’s important to note that the problems we are facing are likely to be temporary.

While nobody has a crystal ball, it seems reasonable to expect a return to something resembling normal, with our old rate of economic growth resuming within a couple of years.

Before you know it, we’ll be consumed once more by debates about how to rekindle what was weak growth, weak wages growth, and weak productivity growth - our economic preoccupations before the pandemic struck.

References

  1. ^ JobKeeper (theconversation.com)
  2. ^ supplement (theconversation.com)
  3. ^ A$38 billion in superannuation withdrawals (theconversation.com)
  4. ^ Argentina (www.wsj.com)
  5. ^ Turkey (www.reuters.com)
  6. ^ The RBA has got a lot right, but there's still a case for an inquiry (theconversation.com)
  7. ^ dangerous (www.theguardian.com)
  8. ^ accompanying statement (www.rba.gov.au)
  9. ^ definition (www.forbes.com)
  10. ^ Global recession is increasingly likely. Here's how Australia could escape (theconversation.com)

Read more https://theconversation.com/global-recession-looks-likely-even-if-australia-escapes-it-we-are-in-for-a-bad-couple-of-years-192572

Times Magazine

Headless CMS in Digital Twins and 3D Product Experiences

Image by freepik As the metaverse becomes more advanced and accessible, it's clear that multiple sectors will use digital twins and 3D product experiences to visualize, connect, and streamline efforts better. A digital twin is a virtual replica of ...

The Decline of Hyper-Casual: How Mid-Core Mobile Games Took Over in 2025

In recent years, the mobile gaming landscape has undergone a significant transformation, with mid-core mobile games emerging as the dominant force in app stores by 2025. This shift is underpinned by changing user habits and evolving monetization tr...

Understanding ITIL 4 and PRINCE2 Project Management Synergy

Key Highlights ITIL 4 focuses on IT service management, emphasising continual improvement and value creation through modern digital transformation approaches. PRINCE2 project management supports systematic planning and execution of projects wit...

What AI Adoption Means for the Future of Workplace Risk Management

Image by freepik As industrial operations become more complex and fast-paced, the risks faced by workers and employers alike continue to grow. Traditional safety models—reliant on manual oversight, reactive investigations, and standardised checklist...

From Beach Bops to Alpine Anthems: Your Sonos Survival Guide for a Long Weekend Escape

Alright, fellow adventurers and relaxation enthusiasts! So, you've packed your bags, charged your devices, and mentally prepared for that glorious King's Birthday long weekend. But hold on, are you really ready? Because a true long weekend warrior kn...

Effective Commercial Pest Control Solutions for a Safer Workplace

Keeping a workplace clean, safe, and free from pests is essential for maintaining productivity, protecting employee health, and upholding a company's reputation. Pests pose health risks, can cause structural damage, and can lead to serious legal an...

The Times Features

Tricia Paoluccio designer to the stars

The Case for Nuturing Creativity in the Classroom, and in our Lives I am an actress and an artist who has had the privilege of sharing my work across many countries, touring my ...

Duke of Dural to Get Rooftop Bar as New Owners Invest in Venue Upgrade

The Duke of Dural, in Sydney’s north-west, is set for a major uplift under new ownership, following its acquisition by hospitality group Good Beer Company this week. Led by resp...

Prefab’s Second Life: Why Australia’s Backyard Boom Needs a Circular Makeover

The humble granny flat is being reimagined not just as a fix for housing shortages, but as a cornerstone of circular, factory-built architecture. But are our systems ready to s...

Melbourne’s Burglary Boom: Break-Ins Surge Nearly 25%

Victorian homeowners are being warned to act now, as rising break-ins and falling arrest rates paint a worrying picture for suburban safety. Melbourne residents are facing an ...

Exploring the Curriculum at a Modern Junior School in Melbourne

Key Highlights The curriculum at junior schools emphasises whole-person development, catering to children’s physical, emotional, and intellectual needs. It ensures early year...

Distressed by all the bad news? Here’s how to stay informed but still look after yourself

If you’re feeling like the news is particularly bad at the moment, you’re not alone. But many of us can’t look away – and don’t want to. Engaging with news can help us make ...