Australian economy on the brink of recession

At the moment, the Australian economy feels a little like an out-of-control car.

Interest rates keep rising faster and faster, the jobs market has remained surprisingly robust, economic growth is falling fast, inflation is jumping around but seems to be on the way down and many households are struggling big time thanks to the rising cost of living.

Savers are finally getting some return on their cash in the bank but those with really large debts are struggling hard, with mortgage stress levels very high but actual defaults still at historically low levels.

Oh, and the housing rental market remains tighter than a drum, with tiny vacancy rates, high rents that are only just starting to level out a little and property prices that seem to have halted their tentative rally as further interest rate rises start to bite.

Consumers going on strike

Consumer confidence has fallen hard and actual consumer spending on non-essentials seems to be sliding fast, with a flagged 25% profit fall by electronics and furniture retailer Harvey Norman as good an indicator as any.

Then there is the forward-looking indicator of economic growth, the Westpac-Melbourne Institute leading index, which has sunk to its lowest level since the COVID-19 pandemic.

After ten negative results in a row, the six-month annualised growth rate in the index, which signals the likely pace of economic activity relative to trend three to nine months into the future, fell to negative 1.09% in May from negative 0.78% in April.

All of which led Westpac to revise its 2023 growth forecasts down to 0.6%, lower than the previous and already gloomy figure of 1% growth.

What might happen next?

This plays in nicely into our out-of-control car analogy but does little in the way of preparing all of us for what might happen next.

It is clear the economy is weakening and slowing and is incredibly susceptible to offshore shocks but with so many moving parts and pressure points, what might happen from here?

Well, you would have to say that the chances of avoiding a recession – which Australia has become somewhat famous for after narrowly stimulating itself out of one after the global financial crisis (GFC) – are becoming unlikely, despite pockets of strength.

Narrow path now a bush track

The world economy is slowing and the Reserve Bank’s “narrow path’’ to a soft landing is looking more like an overgrown bush track by the day.

Obviously, there are a plethora of economic indicators that you can look to for guidance but for me the jobs market is the one to keep a really keen eye on.

While employment has remained very strong amid labour shortages and continuing supply chain issues, the financial strains within households and record levels of immigration are going to be a big test.

Side hustles go mainstream

The Bureau of Statistics has consistently been recording increases in the number of people working multiple jobs to keep up with rising prices and Finder data has shown that an incredible 7% of Australians have now taken on a second job to bring in extra cash as they struggle to deal with soaring food prices and the cost of housing.

Add in the incoming migrants seeking work and the supply side of the jobs equation seems to be full enough to deal with any shortages and could even be enough to reduce wage pressures and boost unemployment.

Then there are the sectors of the economy that are no longer doing well, such as property and retail, and the ingredients for a weakening in employment seem inescapable.

Could China come to the rescue again?

If Australia is to be “lucky” once more in its enviable record of artfully dodging those two consecutive quarters of negative growth that define a recession, the likely saviour will once again be China.

Unlike us, China is suffering from falling prices along with a weakening economy and it is possible that the magic wand of economic stimulus could once again be waved in the Middle Kingdom.

As we all know too well, when China stimulates, we benefit as Australia’s mineral and agricultural exports find a very happy home on many ships travelling to the big Chinese ports.

It might be too much to hope for after China helped us through the GFC so nicely but when you look around, there are not too many other potential positives to hope for.