It’s the question on the lips of economists, analysts, actuaries, executives, journalists and, most importantly, everyday Australians: Will we experience a recession in 2023? Of course, the answer is complicated.
Before we can determine whether or not a country will enter into recession, it’s important to understand the definition of the term. However, it seems that even the interpretation of the terminology is in dispute.
What is a recession?
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. By this definition, the United States entered a recession in the summer of 2022, according to Forbes.
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.
While the question of whether or not the U.S. is in recession right now may be up for debate, 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.
“With the exception of a peak probability of a recession of 41.14% in October 1966, the New York Fed's recession-forecasting tool hasn't been wrong if it's surpassed 40%,” according to writer Sean Williams of The Motley Fool.
“In other words, if the New York Fed's recession probability indicator surpasses 40%, we've had a recession within 12 months, without fail, for more than a half-century. In December 2022, this recession probability tool hit 47.31%. That's the highest reading since 1981, and a very clear indication that economic activity is expected to slow at some point in 2023.”
So, will Australia experience a recession?
Australia managed to avoid recession for more than 28 years, including through the Global Financial Crisis of 2007-2008. This represented the longest period of growth without a recession for a developed country since the System of National Accounts was established in 1953.
Then, the global COVID-19 pandemic hit. The Australian economy entered a recession after GDP fell 0.3 per cent in Q1 2020 and a whopping 7 per cent in Q2 2020 - the steepest contraction in recorded history.
Prior to this, the last time Australia endured a recession was 1990-1991. During this period, GDP fell by 1.7 per cent, employment sank 3.4 per cent and the unemployment rate rose to 10.8 per cent.
For cultural context, we began sending troops to assist the United Nations in the Gulf War; Professor Fred Hollows was named Australian of the Year (1991) for his work in ophthalmology; and MC Hammer (“U Can’t Touch This” in 1990), Sinéad O'Connor (“Nothing Compares 2 U” in 1990) and Darryl Braithwaite (“The Horses” in 1991) all topped the Australian Recording Industry Association (ARIA) charts.
Dwindling GDP growth and mounting inflationary pressures
The latest Australian Bureau of Statistics (ABS) national accounts estimates revealed that the economy expanded 0.6% quarter-on-quarter in Q3 of 2022, compared with market forecasts of 0.7%, following a rise of 0.9% in Q2. Although this represents the fourth straight quarter of economic growth, it was also the softest rise in the sequence.
Inflation remains persistently sticky on the back of corporate profits, stubborn house prices and high rents, potentially paving the way for the RBA to deliver a fresh round of interest rate rises in the months ahead.