If the forecasts of the investment company Deutsche Bank come true, Australia will enter a recession next year.
Core items:
- Deutsche Bank expects the unemployment rate in Australia to increase by one percentage point to 4.5 percent by the end of 2023
- The RBA’s unemployment forecast for the end of 2023 is significantly lower at 3.7 percent
- A decline of one percentage point is considered a recession by the Bank’s definition, but is not a technical recession
However, the bank did not use the accepted definition of “technical recession” to create its forecast.
A recession is traditionally defined as two consecutive quarters of negative economic growth (GDP).
Instead, Deutsche Bank looked at where it thinks the unemployment rate is headed.
Australia’s unemployment rate is expected to rise next year as the economy slows.
“We expect Australia’s unemployment rate to be 4.5 percent by the end of 2023, one percentage point higher than the current unemployment rate of 3.5 percent,” said Deutsche Bank chief economist Phil O’Donoghoe.
The RBA’s forecast unemployment rate for the end of 2023 is significantly lower at 3.7 percent.
“If our forecast comes true, it would be considered a recession by our definition, even if – as our forecasts assume – gross domestic product (GDP) avoids two consecutive quarters of negative growth,” he said.
“We have long considered this ‘technical’ definition of recession extremely unhelpful for Australia.
“From a welfare perspective, a one percentage point rise in the unemployment rate over the course of a year is a much more useful description,” argued Mr O’Donoghoe.
Labor market economist Leonora Risse disagreed.
She doesn’t think that referring to a sharp rise in the unemployment rate is a reasonable way to measure an economic recession.
“Recession means going backwards,” said Dr. cracks.
“So economists think of recessions when the economy slows so much that economic activity actually declines and overall economic activity is lower than in the previous quarter.
“Technically, we need to see two consecutive quarters of negative GDP growth for the economy to be officially classified as in recession.
“It’s possible that the unemployment rate is rising, but that the economy hasn’t slowed down enough to be in recession.”
So what could be driving up unemployment?
Much depends on how buyers or consumers react to the already announced Reserve Bank rate hikes.
“Consumer spending has been supported by past income gains, asset prices and accumulated savings during the pandemic,” noted Reserve Bank Deputy Governor Michele Bullock in a speech earlier this month.
“However, these sources of support are being eroded to some extent by high inflation, rising interest rates and falling property prices, and this is expected to contribute to a slowdown in consumption growth from early next year.”
Deutsche Bank forecasts underscore the economy’s reliance on continued robust consumer demand.
“On the face of it, the already ongoing shock to households’ financial commitments points to significant downside risks to the RBA’s consumption forecasts,” Mr O’Donoghoe said
“But households can draw on pent-up COVID savings to smooth consumption.
“We expect they will, the question is by how much?”
One engine of growth that the economy has lacked in recent years has been strong wage growth.
The government is currently trying to get its Industrial Relations Act through the Senate.
Part of the bill is a proposal to expand access to multi-employer bargaining – a form of company bargaining in which workers within an industry join forces to negotiate higher wages.
The Bureau of Statistics is due to release updated data on how much extra Australians are being paid on Wednesday with the official wage price index for the September quarter.
The October unemployment rate will be released by the ABS on Thursday.
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