A peak industry body has warned it is “likely” Australia could be hit by a “severe recession” in the coming years as the economic pain facing the country deepens.
A new report by the Institute of Actuaries, the nation’s peak actuarial body, identifies “three alternative futures” Australia could face, describing the scenarios as “all likely and all with vastly different outcomes for Australians”.
Actuaries are behind-the-scenes data experts who specialize in risk analysis, and the sobering report outlines the possibility of three future outcomes, including stagflation, a major correction in housing prices and modern monetary theory by policymakers.
Alarmingly, the institute finds that “all three scenarios are bleak, leading to significant declines over the next 15 years.”
Actuary Hugh Miller, who collaborated on the Green Paper with independent economist Michael Blythe, said the baseline scenario, a benchmark of three alternative futures, is the only one that avoids recession with positive, albeit modest, GDP growth rates. but still includes growth. downside risks. This is the central case or the expected path for the Australian economy and financial markets at the moment.
However, three other scenarios involve policymakers going off course and burdening businesses and the public with stagflation, mismanaging the housing price slump, or excessive government spending, with dire consequences for the country.
Scenario one is stagflation, meaning a period of high inflation combined with high unemployment, which the paper says is “likely in the current environment” given high energy and food prices, supply chain pressures and supply chain difficulties.
In this example, we would see “expansionary fiscal policy, extremely loose monetary policy and
supply-side constraints’, which will combine to create a ‘wage-price spiral’, with inflation peaking at around 9 percent.
“The ultimate solution is a severe recession, including high unemployment and high yields on long-term government bonds,” the report said.
A second alternative future is a major correction in house prices, which have already fallen significantly across the country.
Under this scenario, a 30 percent drop in prices is being explored, which would be prompted by an “extremely aggressive RBA tightening cycle leading to a cascading effect on the entire economy and financial system.”
The economy can only come out of recession when the RBA reverses course and the nation moves to expansionary policy parameters.
Finally, the third option is to adopt Modern Monetary Theory (MMT), which focuses on achieving full employment by financing government spending through money creation rather than debt issuance.
However, the paper notes that MMT was “not well-suited to withstand the stimulus generated by inflation.”
And the institute noted that “while these alternative future scenarios appear bleak, implying a significant downturn at some point, optimistic alternative scenarios are likely.”
It comes as Australian companies face the prospect of recession, skills shortages and increased competition, with recent Aon research showing a whopping 79 per cent of business leaders expect a downturn, with only 35 per cent feels “very prepared” for it.
It also comes after the RBA earlier this month raised Australia’s official cash rate by 25 basis points to 3.10 per cent, the eighth consecutive rate hike this year, marking the return of the cash rate to its highest level since November 2012 :
At the time, Indeed global workplace APAC economist Callum Pickering predicted that further increases were “likely next year unless inflation gets under control or real cracks start to appear in the Australian economy”.
“Nevertheless, the rate of policy tightening should slow down next year. The market expects the cash rate to settle at just below 3.6 percent next year, which would mean two more 25-basis-point hikes. That’s in stark contrast to the eight consecutive rate hikes we’ve had this year,” he said.
“It is perhaps a surprise, considering that inflation remains hot. The RBA’s latest inflation forecast will justify an aggressive hike next year, but this must be balanced against the risks of a sharp downturn or recession.”