Will there be a recession in Australia in 2024?

Before we can determine whether or not a country will enter into a recession, it’s important to understand the concept. 

The Reserve Bank of Australia (RBA) asserts that, while there is no single definition of recession, it can be perceived as a sustained period of weak or negative growth in real Gross Domestic Product (GDP) accompanied by a significant rise in the unemployment rate. 

A commonly accepted rule of thumb for characterising a recession is two consecutive quarters of negative GDP growth. Most economists and analysts would classify this scenario as a technical recession. 

By this definition, the United States entered a recession in the first half of 2022, according to the Bureau of Economic Analysis (BEA). However, the National Bureau of Economic Research (NBER) - an organisation that delineates U.S. business cycles - refutes this claim, stating that they “do not identify economic activity solely with real GDP, but consider a range of indicators”, including Gross Domestic Income (GDI) and monthly statistics. 

Although the US is not in a recession right now, one economic indicator hasn’t been wrong in 56 years - the Treasury bond yield curve, which denotes the price difference between the 10-year bond rate and the three-month bond rate. 

At the time of writing, the yield curve for U.S. Treasury bonds is not inverted, but it is relatively flat. The yield on the 10-year Treasury bond is 4.22%, while the yield on the three-month Treasury bond is 5.36%, resulting in a yield spread of -1.14%. 

Source - https://www.worldgovernmentbonds.com/country/united-states/

An inverted yield curve occurs when the yield on short-term bonds is higher than the yield on long-term bonds, which has historically been a reliable indicator of an economic recession. However, the yield curve is not the only factor that determines whether a recession will occur, and other economic indicators, such as GDP growth, employment rates, and inflation, must also be considered. 

Economists often look at leading, lagging, and coincident indicators to assess the economic health of a country and predict future trends. 

Leading indicators generally include stock market returns, the yield curve, consumer sentiment indexes, and new orders for durable goods. They can provide early signals of an economic slowdown or recovery. 

Lagging indicators include factors like unemployment rates and corporate profits that typically tend to change after the economy has already begun to follow a particular trend. These indicators could help confirm the pattern. 

For a real-time snapshot of the economy, one may look at coincident indicators that include GDP, retail sales, and personal income. These indicators move in line with the economy, providing a peek into the ongoing economic conditions. 

Furthermore, global economic factors, geopolitical events, and unexpected disruptions may also impact the accuracy of recession predictions. The after-effects of the pandemic, the ongoing war between Russia and Ukraine and the worrisome developments in the Middle East are all factors at play shaping the fate of various global economies. But the outcomes of such events cannot be predicted, which means recession predictions are almost always subject to uncertainty. 

Despite earlier concerns of a potential recession, Australia successfully avoided a technical recession in 2023. This was largely attributed to a significant increase in immigration, with more than half a million people relocating to Australia during the year, adding to the total demand even as per capita consumption declined. However, it's unlikely that another half a million people will migrate to Australia in 2024, which could lead to weaker Gross Domestic Product (GDP) figures.

According to the RBA’s Statement on Monetary Policy from February 2024, Australia's GDP growth for the year ending December 2023 stood at 1.5%. The economy experienced a slowdown throughout 2023, with annual growth rates decreasing from an initial 2.4% at the start of the year to 1.5% by year-end. 

The increase in migration significantly contributed to sustaining Australia's economic growth, influencing key areas such as consumer spending and the housing market. However, AMP’s Deputy Chief Economist, Diana Mousiana, pointed out that a 2.1% GDP growth over the twelve months to September 2023 "is considered weak for Australia". 

Regarding inflation, by the end of December 2023, Australia's year-on-year inflation rate stood at 4.1%, marking the lowest rate since the fourth quarter of 2021. Despite a decline from earlier quarters, inflation slightly exceeded the Reserve Bank of Australia's target range of 2-3%. Future projections suggest inflation will return to the target range of 2-3 per cent in 2025, potentially reaching the midpoint in 2026. 

While concerns about high inflation and a contracting economy might be considered in a negative light, it's important to recognise the silver lining: inflation has seen a decrease in the last quarter and is projected to continue its downward trend. Further, the Reserve Bank of Australia (RBA) has maintained the interest rate at 4.35% after a 25 basis point hike in November 2023, signalling cautious optimism as opposed to the immediate fear of an economic downturn. 

While this doesn’t mean that a recession isn’t a possibility, some economists suggest that any potential recession may not be as severe as feared. Shane Oliver, AMP's Chief Economist, places the chance of a recession at about 40%, emphasising that, should a recession occur, it is expected to be mild. According to him, "While recession is a high risk and markets are no longer priced for it, if it does occur it should be mild." 

Even though Australia's economy narrowly skirted a recession in 2023, the risk of a mild recession still lingers, according to some analysts. It may help to keep finances in check ahead of time to prevent any major complications and ride out the storm.

There are at least five steps you can take to optimistically recession-proof your household: 

1. Assess your budget - Understanding where your money is going each month will provide much-needed perspective and context to your spending habits and allow you to better adjust them accordingly. 
2. Pay down debts - You’ll not only reduce the principal amount owing, but also the total amount you’ll pay in interest charges over time. 
3. Create an emergency fund - Ease the sting of unexpected expenses such as medical bills, urgent home repairs or loss of income by putting aside a small amount each pay cycle. 
4. Speak to your mortgage lender - Home loan rates are on the rise and mortgage stress is a real headache. Consult your lender or a mortgage broker to see if there is anything they can do to assist. 
5. Reach out for help - The National Debt Helpline offers free financial counselling.