Australia's Crisis: Are we on the Brink of a Recession?
- Jun 30, 2024
- 4 min read
Exploring the connection between rising inflation, potential interest rate hikes, and our economic future!
With inflation on the rise in Australia, economists are starting to worry about what the second half of 2024 will bring. Visit the following article on a detailed analysis of the most recent state of inflation in Australia.
As of May 2024, the year-to-date inflation rate has climbed to 4%, up from 3.6% in April. This has sparked concerns about an upcoming cash rate hike by the Reserve Bank of Australia on the 5-6 August RBA meeting. This could mean that the cash rate will increase from the current 4.35% to 4.60%, with a likelihood of it further climbing to 4.85% if inflation remains persistent. All eyes remain on Michele Bullock and Team to see how the economy pans out, especially after she mentioned in her speech that the RBA may be forced to move the cash rate target higher if the inflation is materially stronger than the bank's forecast!
Experts argue that if the RBA decides to hike interest rates, the odds of Australia entering a technical recession jumps to 50%. What is a technical recession though? A technical recession happens when a country experiences two consecutive quarters, or 6 months, of negative economic growth. This is measured by changes in the Gross Domestic Product - the total value of goods and services that are produced in Australia over a year.
Therefore, by the official definition, we are still rather mildly away from a technical recession. Our GDP economic growth is slow, but still positive. However, this is not an accurate measurement of our standard of life. In reality, we are already seeing a deterioration of the standards of living. Look at the sharp increases in fuel prices, or the current cost-of-living crisis, or the rental crisis, or the housing market crisis, or the grocery crisis where we can barely afford a weekly's grocery - the list is endless. Yet the government believes we are not in a recession. See an inconsistency?
That's the problem! GDP economic growth is not a perfect measure of standards of living. So what is? Let's develop insights!
Insight of the Day The better way to measure our standards of living is using a measure known as GDP per capita. We already know that GDP, or Gross Domestic Product, is an accumulated value of goods and services that are produced in Australia over a year. So then what is GDP per capita? Put simply, GDP per capita is Australia's GDP divided by the population, to determine how much we are producing per person in Australia. Think of GDP as a giant pizza - GDP per capita is the slice that each person in Australia receives. The size of each slice shows the average economic output, or products, that each person is meant to get. This is a better measure of individual prosperity - it shows how each individual is doing within the nation! Now that we know what GDP per capita is, let's understand how it is relevant to us! |
Although Australia has barely scraped a positive GDP growth, we are struggling with mild negative GDP per capita growth. Australia has suffered a negative GDP per capita growth for five consecutive quarters now, with an accumulated change of -1.3% from March 2023 to March 2024. According to the World Bank's most recent statistics, Australia's GDP per capita decreased from US$65,077.70 (2022) to US$64,711.80. This means our living standards are gradually declining. We are sure you have felt this - whether it be a greater caution around purchasing your weekly groceries, or racing to CostCo for the cheapest fuel, or delaying the purchase of an item you've liked for a while. We are all suffering from these micro economic challenges - that is our collective problem.
Australia GDP per capita has been negative due to a variety of reasons, including the rising inflation, price gouging by large supermarkets, and aftermath of an economically devastating COVID-19. However, a prominent reason for this decline is Australia's population growth driven by their immigration program. Despite the pandemic-induced border closures where migrants weren't allowed in, the surge in net immigration worth over 500,000 people in the year to June 2023 has placed Australia in a position where migrant numbers would have been if the pandemic never had happened. This is lead by international students seeking Australian education, with 560,000 new students starting a course in Australia in 2023. That means there were more immigrants than the the total population of Canberra! This has not only contributed to the growing demand for rental properties to drive a rental crisis, it has also decreased GDP per capita by increasing the population parameters.
While both the Coalition and Labour party have pledged a restriction on the number of immigrants into Australia to avoid a similar set of situations occurring once again, the new policies remain frowned upon by many. These include a cap of 185,000 people being offered permanent residency in the upcoming financial year, a pledge by Albanese government to cut immigration to 260,000 by June 2025 and then 235,000 by June 2027 (pre-pandemic average), increasing language proficiency requirements and an increase in the rejection rates to Visa's being granted. To what extent these policies will be effective can only be told through time, but what can you do now to safeguard yourself amidst the economic uncertainty we currently live in?
It is important for the Australian household to budget wisely! Planning and managing your finances carefully to navigate the rising costs and interest rates is an important stage to avoid defaulting on existing loans or maintaining a standard of living within this economy. It is also important to diversify your income and assets, ensuring you are not vulnerable to the volatile sectors within Australia currently! This goes alongside a need to invest in building skills and education, also known as human capital, to remain competitive within this job market so you both increase your earning potential and are not adversely affected by the consequences of a recession. Finally, stay informed! Keep up with economic trends and policy changes to make informed financial decisions. That's where we help you out - subscribe to VOSIX now to remain up-to-date with free financial information that is updated and tailored directly to you! Subscribe now to stay ahead of the economic uncertainty of 2024!
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