Australia: Recession risk models show unemployment rate set to rise

Recession risk has become a hot topic in Australia with GDP growth slowing to just 0.2% q/q in Q1, and a sharp interest rate hiking cycle putting the clamps on growth in a bid to curb inflation. We remain bullish on Australia’s chances of navigating the next year without entering a technical recession (consecutive quarters of negative growth). Although there is a material slowdown underway, Q1 was beset by some temporary drags from net exports, while strong population growth and a tight labour market are important bulwarks against recession. Nevertheless, momentum will be patchy of the next two years, and a contraction in GDP per capita is already underway.

We have quantified the probability that the unemployment rate will increase sharply in the next year. Our analysis is informed by a range of high-frequency indicators that typically do a good job of predicting slowdowns. We find that financial market and business survey measures are still sanguine on Australia’s chances of navigating to a soft landing over the next year. But when we factor in the very tight position of the labour market, there is a far greater chance that unemployment will increase from here.

What you will learn:

• Recession risks have increased in Australia, with tighter policy settings starting to put the brakes on activity. However, looking across a range of business survey indicators and financial market information, the warning signs usually associated with large slowdowns are not flashing
  
• We have estimated the risk of a material increase in the unemployment rate (a good proxy for economic slowdowns) over the next year. Our models based on surveys and market spreads see only a relatively low probability of a spike in the unemployment rate ahead.
  
• However, once we account for the very tight position of the labour market currently, the chances of an increase in the unemployment rate increases materially. This accords with our forecast for an increase in the unemployment rate over the next year.