How likely is a recession in Australia?

The World Bank says global growth has slowed sharply, and any 'new adverse development' could instigate a global recession.

In the latest Global Economic Prospects report, the international body has warned that fragile economic conditions mean a global recession in 2023 is a very real possibility.

Elevated inflation, high interest rates, reduced investment and disruptions caused by the war in Ukraine were all cited as contributors to a sharp slowdown in global growth.

For advanced economies, the World Bank projects growth to slow down from 2.5% in 2022 to 0.5% this year.

In recent history, slowdowns of this degree have foreshadowed recession - a recession is defined by the World Bank as a contraction in annual global per capita income.

Australia saw a per-capita recession in 2018.

The World Bank says that any 'new adverse development' to the global economy could prompt recession, which would be the first time in 80 years recession has occurred twice in the same decade.

Higher than expected inflation or subsequent interest rate hikes, a Covid-19 resurgence and escalating geopolitical tensions were all cited as potential triggers.

What is the outlook for Australia?

The most severe warnings in the report were regarding developing nations that could be hit hard by reduced investment.

The report also said advanced economies like Australia were at risk, citing declining consumer confidence in these nations due to high inflation and rapid monetary policy tightening.

Australia has seen eight months of consecutive increases to the cash rate, and inflation is continuing to rise.

The RBA has already warned that a prolonged battle against inflation could result in a recession, with the primary objective of monetary policy for the foreseeable future being to bring inflation to more manageable levels.

Australian analysts though expect to narrowly avoid recession.

AMP Chief Economist Shane Oliver for example, has given several reasons for relative optimism for Australians in 2023.

"Inflationary pressures may have peaked and are slowing rapidly," Mr Oliver said.

"Supply chain pressures have eased; demand is cooling, and labour markets are showing signs of topping out."

When discussing global prospects, he did say that the chances of the United States and Europe slipping into recession were probably over 50%, which would hurt the Australian economy.

However, he also believes that these key economies would not see as dramatic a downturn as bodies like the World Bank fear, and that furthermore, strong Chinese growth could offset the negative impacts for Australia.

"In the US it may just be a sharp slowdown or mild recession in 2023 - if the US Federal Reserve starts to ease up on the brake soon and given the absence of other excesses that need to be unwound," Mr Oliver said.

"Europe has moved away from Russian gas very quickly and providing its winter is mild, may continue to hold up better than feared.

"After initial COVID-related setbacks, Chinese growth is likely to rebound in 2023 as it reopens.

"China is likely to see a surge in cases initially, but markets are likely to largely look through this to the reopening boost ahead which will provide an offset to slower growth in the US and Europe."

Mr Olivers conclusion was that growth in Australia would fall to about 1.5% in the year ahead, but crucially, inflation would fall with it.

This though is a prediction not taking into account any 'adverse developments' discussed by the World Bank that could impact the global economy.

While Mr Oliver was optimistic about this too, and a hopeful 'thawing' of the war in Ukraine as reason 2023 may not be as charged geopolitcally, he did list several potential sources of concern.

A sharper than expected fall in Australian home prices (AMP has previously predicted a 15% drop in house prices) could cause financial instability, as would inflation not falling as the RBA expects.

"How likely is a recession in Australia?" was originally published on Savings.com.au and was republished with permission.