The risk of Australia entering recession has just risen

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There are early signs Australia’s economy is buckling under the strain of inflation and cost-of-living pressures.

The Bureau of Statistics reported on Tuesday that retail sales for December fell 3.9 per cent.

One economist described it as a “plunge” in sales.

What does the fall in sales mean?

The data captures Boxing Day sales and the lead-up to Christmas.

Black Friday sales seem to have attracted more shoppers to spend in November last year.

What appears to be happening is that consumers are bringing forward their Christmas and holiday spending to Black Friday and Cyber Monday in late November.

But BetaShares chief economist David Bassanese says there are other forces at play tightening shoppers’ purse strings.

“As regards consumer spending specifically, a sharp curtailment [in December retail spending] due to higher interest rates and weaker house prices remains the major downside risk for the economy this year.”

He thinks the Reserve Bank board — which is due to meet next week — will welcome the news of falling consumer spending.

“It will also likely want to see a run of soft consumer spending numbers before it could be convinced households are really starting to pull in their reins – and are not just shifting spending from one month to the next,” Mr Bassanese says.

And therein lies the problem.

Will interest rates just keep going up?

There are early signals the economy is faltering, but the evidence will need to build before the Reserve Bank is convinced to either pause or ease monetary policy, economists say.

Economists predict that despite recent drops in retail sales and house prices, the Reserve Bank will likely raise interest rates this year.

“While the RBA will likely move more slowly in 2023 than it did in 2022, we now expect four more 25 basis point hikes this year: 25 basis points in each of February and March, and 25 basis points each at the May and August meetings,” Deutsche Bank chief economist Phil O’Donoghoe said in a note.

“That brings us to a revised terminal [Reserve Bank cash] rate of 4.1 per cent, 75 basis points higher than our previously terminal rate of 3.35 per cent at the February meeting.”

What does this mean for the housing market?

Former Treasury economist Warren Hogan argues interest rates have now risen high enough that asset prices, like property, for example, are falling in a meaningful way.

Today’s property price figures from CoreLogic back up this idea.

Property prices are down, but the risk of a recession rising.

In Sydney for example, property prices are now down 13.8 per cent, which means the market is now in a technical “correction”.

“Given the upside surprise to [inflation] measures, another [interest rate] hike in February is highly likely; we expect a further hike in March too,” investment firm HSBC wrote in a note.

“The risk is rising that a hard landing is needed to get inflation down.”

A “hard landing” is economist-speak for “recession”.

Impact Economics and Policy lead economist Angela Jackson says this week’s data supports the case, which began building last year, that the Australian economy would falter in 2023, when consumer spending — which makes up the bulk of Australian economic growth — shows signs of significant strain.

“[Retail sales] adds to signs that interest rate hikes are starting to slow the economy, but worth noting that falls of similar magnitude have been recorded the last three years in December after strong November figures,” Dr Jackson says.

“This isn’t retail spending falling off a cliff, but expect much slower growth through the year as tight monetary policy and rising unemployment impact households.”

The Drum / By David Taylor (Original ABC Article)