A global recession looks increasingly likely, but here’s how Australia can avoid it | Peter Martin for Conversation

the world stock market tanking Concerns about recession in the US, UK and Europe and In fact, the OECD is predicting a European recession.

So is a recession in Australia inevitable? Not at all.

The good news is that there are some reasons to think Australia may be able to escape a slide into a global recession – though it will require careful management.

What could plunge Australia into recession?

This is the worst case scenario. The United States will continue to push interest rates up until the economy hits a recession, and Australia will come under similar pressure.

Here’s how it’s played at the moment: The US Federal Reserve has raised rates at each of its last five meetings. The past three rate hikes have been massive by Australian and US standards, at 0.75 percentage points each, which should be enough to decelerate. Predicted US economic growth is what the Fed wants to fight inflation.

But the Fed plans to go further.Its chairman, Jerome Powell, says he expects continuous increaseand last week admitted they could dump the country fall into recession:

No one knows if this process will lead to a recession or, if so, how severe that recession will be. It will depend on how quickly wage and price inflationary pressures subside, whether expectations are anchored, and whether labor supply increases.

Powell has said he is prepared to risk a recession to keep inflation in check.

US Federal Reserve Chairman Jerome Powell. Photo: Jim Lo Scalzo/EPA

Top UK bankers already predict recession

Powell is not alone. Bank of England Governor Andrew Bailey has raised interest rates seven times since December. Bailey says he is ready to do more to fight inflation.”force if necessary– and is actually predicting a recession, It probably started, he says.

The new UK government, headed by Liz Truss, is on high alert, announcing a £45 billion (A$75 billion) budget on Friday.growth planIt consists of £60bn (A$100bn) of spending to limit households and businesses, plus tax cuts and infrastructure spending. Utility costs.

Given what is currently happening abroad, one might expect the Reserve Bank of Australia to exercise caution and act differently than central banks abroad.

Except it’s not that easy.

Shoppers walk past a graffitied cash machine on Oxford Street in London. Photo: Kirsty Wigglesworth/AP

pressure the United States to comply

Every time the US raises interest rates (seven times since March), investors buy US Dollars to take advantage of higher interest rates. This pushes up the price of the US dollar relative to the currencies of countries that did not raise prices.

This means that unless countries such as Australia raise their prices in the same way as the US, its currency will likely depreciate against the US dollar. This means that they are likely to depreciate against the currencies in which most transactions take place.

This means more expensive imports, which means faster inflation.

And the Reserve Bank of Australia is trying to keep inflation in check.

As a result, every time the US raises interest rates (however recklessly), there is pressure on Australia to do the same, simply to keep inflation from worsening.

The risk of an “unreasonably deep recession”

Since March, when the US began pushing rates more aggressively than Australia did, the value of the Australian dollar fell from US$0.73 to below US$0.65, putting upward pressure on US dollar-traded commodities by about 11%. .

Australia’s inflation rate is already predicted, 7.75% This year, the Reserve Bank’s 2-3% Targets, plus inflation, is what banks don’t want.

This will lock countries such as the UK (whose currency is record low against the United States in the wake of tax cuts) and Japan (where the government intervened to try to stop the currency from depreciating), it becomes semi-dependent on the United States.

Failure to follow that lead will exacerbate inflation.

That is why US economist Paul Krugman says there is a serious risk that the Fed’s actions will “boost the US”. and the world We will be in an unfairly deep recession.”

Going your own way could hurt your dollar

The risk is not just that the US goes too far. The risk is that other countries, including ours, will follow suit by pushing up interest rates to preserve the value of their currencies, amplifying the impact of a US recession and making it global.

Central banks are often mentioned. hunt in a flockWhat gets less attention is the pressure they have to follow each other.

In Australia, AMP Chief Economist Shane Oliver said: may crash.

But here’s the good news. We know Australia can avoid the worst of the global economic downturn.

The Reserve Bank of Australia is trying to keep inflation under control. Photo: Rick Rycroft/AP

How Australia Avoided Past Recessions and Made It Possible Again

Australia avoided recession in 1997 asian financial crisiswe escaped the United States in 2001.”technology wreck“,and”Great recession” During the global financial crisis.

In part, this is due to good judgment. Our Reserve Bank was able to make clear decisions about when to follow the US on interest rates and when not to.

It rose again after Russia’s invasion of Ukraine, and was helped by rising commodity prices that underpin the currency, even though it has not raised interest rates as aggressively as the United States.

When the time is right, the Reserve Bank of Australia would be wise to separate from the US. If the Federal Reserve pushes interest rates to the point where they are likely to trigger a recession in the US, Australia would recommend not raising interest rates but lowering them. US economy It reduces inflation by itself.

If the Reserve Bank of Australia believes that moment is near, it should consider reducing the size of rate hikes (0.5 percentage points on the last four occasions).

the next meeting is next TuesdayBecause of its importance, the Bureau of Statistics decided to Monthly measures Inflation so far Thursdaypublish results for both July and August at once.

But banks need more than information. It takes intuition and common sense that has kept us out of trouble in the past.

https://www.theguardian.com/business/2022/sep/28/a-global-recession-looks-increasingly-likely-but-heres-how-australia-could-escape-it A global recession looks increasingly likely, but here’s how Australia can avoid it | Peter Martin for Conversation

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