An industry association has warned that it is “likely” that Australia could be hit by a “severe recession” in the coming years as the economic pain the country faces escalates.
A new report from the Actuaries Institute, the country’s top actuarial body, has revealed the “three alternative futures” Australia could face, describing the scenarios as “all plausible and all with vastly different outcomes for Australians”.
Actuaries are behind-the-scenes data experts who specialize in analyzing risk, and the sobering report outlines the possibility of three future outcomes, including stagflation, a major house price correction, and policymakers’ acceptance of modern monetary theory.
Alarmingly, the institute reveals that “all three scenarios are bleak, resulting in a significant recession sometime in the next 15 years.”
Actuary Hugh Miller, who worked on the green paper with independent economist Michael Blythe, said the base case, which measures the three alternative futures, is the only recession-avoiding scenario with positive, though modest, GDP growth rates. but still comes with rising downside risks. This is currently the central case, or projected path, for the Australian economy and financial markets.
However, the three other scenarios involve policymakers going off track and burdening businesses and the public with stagflation, mishandling a housing price collapse or excessive government spending, with dire consequences for the nation.
Scenario one is stagflation – meaning a period of high inflation coupled with high unemployment – which the paper says is “plausible in the current environment” given high energy and food prices, supply chain pressures and problems in the supply chain.
In this example, we would see “expansive fiscal policy, overly accommodative monetary policy and
supply-side constraints” that together would lead to a “wage price spiral”, with inflation peaking at around 9 percent.
The ultimate solution is a severe recession, with high unemployment and high long-term government bond yields.
The second alternative future is a major correction in house prices, which have already fallen significantly across the country.
This scenario examines a 30 percent drop in prices, which would be caused by an “overly aggressive RBA tightening cycle leading to a cascading effect in the economy and financial system.”
The economy could not emerge from recession until the RBA reversed its course and the nation moved to expansionary policy settings.
Finally, the third option is the application of modern monetary theory (MMT), which focuses on achieving full employment by financing government spending by creating money rather than issuing debt.
However, the paper notes that MMT was “not well suited to cope with the ensuing rise in inflation”.
And the institute noted that “while these alternative future scenarios seem bleak, with a significant recession occurring at some point, optimistic alternative scenarios are plausible.”
It’s because Australian businesses are coming under increasing pressure from the potential for recession, skills shortages and increased competition. Recent research from Aon shows that a whopping 79 percent of business leaders expect a recession, and only 35 of them feel “very prepared” for it.
It also comes after the RBA raised Australia’s official cash rate earlier this month by 25 basis points to 3.10 percent – the eighth consecutive rate hike this year, marking the return of cash rates to their highest level since November 2012.
At the time, Callam Pickering, APAC economist at Global Job Site Indeed, predicted that further increases “are likely next year until inflation is controlled or real cracks start to appear in the Australian economy”.
“Nevertheless, the pace of policy tightening should slow next year. The market expects cash rates to peak at just under 3.6 percent next year, which would mean just two more 25 basis point increases. That is in stark contrast to the eight consecutive rate hikes we’ve had this year,” he said.
“That may come as a surprise as inflation continues to run red hot. The latest inflation outlook from the RBA would warrant aggressive hiking next year, but that needs to be weighed against the risks of a severe downturn or recession.”