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Are we heading for a recession?

Peter Switzer
26 September 2022

Our stock market is expected to open down a big 1.25% today, as our dollar drops to 65.3 US cents and, don’t forget, there are predictions of a 25% fall in house prices. If these aren’t bad enough, there are forecasts that the housing construction sector is set to crash as well.

These things are enough to make you wish you had never gotten out of bed! But remember, these are all predictions and forecasts and let’s be historically honest, economists are like weather forecasters — they do their best to guess the future but they’re often wrong.

There’s also another problem with forecasters and that’s they’re often preoccupied with the short term, which is easier to ‘guess’. For example, it’s easy for me to predict that the RBA will raise interest rates on the first Tuesday in October but it’s a lot harder to guess when they’ll stop raising rates, and even harder to work out when they’ll cut again.

The Australian’s Geoff Chambers looked at the challenges for the building sector and they are numerous. Let me list them:

1. We need 200,000 new houses and apartments to keep up with population growth but this year we won’t get to that number.

2. In fact, Master Builders Association predicts we won’t top it until 2026.

3. Rising interest rates are hurting demand and adding to costs for builders.

4. Covid-supply chain problems are slowing production and raising costs.

5. Migration levels are low, which not only reduces demand, it doesn’t help the supply of labour problems.

The Federal Government’s Housing Minister Julie Collins is making a commitment to help the sector, while in his October 25 Budget, Dr Jim Chalmers is likely to address the issues threatening the sector.

At this stage, the consensus of economists still thinks Australia can dodge a recession. Two months ago, 32 out of 32 economists surveyed by the AFR ruled out a recession in 2023 and 2024, but some of them are becoming a tad negative about our prospects.

An ABC story recently reported that “RBA officials say that, at this point, they still have confidence Australia can avoid a recession.” However, the RBA’s forecasting prowess is under question.

Jo Masters, chief economist at investment institution Barrenjoey, says a probable recession is "on the cards" for Australia. Jo is a good economist but the accuracy of her guess will be determined by how many interest rate rises we cop from Dr Phil Lowe and just how bad the US falls into recession.

Right now, people like Jo and Westpac’s Bill Evans think the cash rate could be taken as high as 3.6% by next year. Along with overseas problems, this will cause a recession and will lead to the RBA actually cutting rates!

The current cash rate is 2.35%. If it goes to 3.6%, you can bet a recession is likely, and that’s why I’m betting the RBA won’t take the cash rate so high.

The actions of central banks between now and Christmas will have a big bearing on what will happen to stock prices, house prices, the health of the housing sector and whether we’re likely to end up in a recession.

The three dates to look out for are:

1. October 4, when the RBA is likely to raise the cash rate by 0.5%. What the bank says about future rises will be important for the economy and markets.

2. October 13, which brings the next US inflation reading. If it’s better than expected, the stock market could start going higher, but if it’s another high number, stocks will slump again. I’d say a US recession will be more likely.

3. October 25 sees Dr Jim Chalmers unveil his first Budget, which needs to be anti-inflationary but wisely stimulatory if our economy is slowing down and possibly heading for a recession.

I’ve said this many times but we are in the hands of central banks and official statisticians. Right now, the outlook seems worrying but there is a lot of uncertainty and you can’t rely on forecasts because they’re only forecasts.

Too many people are predicting a local recession and market Armageddon based on their ‘best guesses’, which are based on ‘best guesses’ of others.

I think this from Mark Twain is appropriate: “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

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