Leading economists have warned that Australia could plunge into chaos with rising unemployment and poverty if the country goes into recession.
Last week, one of Australia’s ‘Big Four’ banks said continued aggressive rate hikes could push Australia into recession.
The RBA is expected to announce a hike in rates for the sixth time in a row today, with an expected hike of 0.5 per cent.
This will take interest rates to a nine-year high of 2.85 per cent from a record low of 0.1 per cent earlier this year.
Some economists have also predicted that rates could reach 4.2 percent by the middle of next year.
The deputy governor of the Reserve Bank of Australia warned that the outlook for the global economy was not good, with economists saying a recession is “on the cards” for Australia.
If a recession strikes, unemployment will rise sharply and poverty will “absolutely” increase, Matt Grudnoff, senior economist and director of the Australia Institute’s economics program, told Daily Mail Australia.
Economist Ross Garnott, a professor at the University of Melbourne, said the cost of the recession would be “very high” and send Australians back into “long-term unemployment”.
Grudnoff said Australia could take years to recover from the effects of a potential recession.
Economist Ross Garnott, who is also a professor at the University of Melbourne, said the cost of the recession would be “very high” and send Australians back into “long-term unemployment”.
If a recession strikes, unemployment will rise sharply and poverty will “absolutely” increase, said Matt Grudnoff, a senior economist and director of the Australia Institute’s economics program.
‘With the slowdown from the Covid-19 pandemic, there was a quick rebound, but it was unusual.
‘If we enter an interest rate recession there is no guarantee of a rebound. Unemployment will rise rapidly and create a snowball effect that will cause more people to lose their jobs.
“The current recession parallels the 1991 recession, and it took 10 years for unemployment to recover to previous levels after that.”
He also said people would struggle to pay their mortgages and that home prices and rents would drop as unemployment rises.
The economist suggested that the recession could also lead to an increase in homelessness.
Garnaut said: ‘The cost of the recession will be enormous. Those who have had the opportunity to enter employment in the strong labor market conditions of the past year, and those like them, will return to long-term unemployment.
“Australia will return to a situation worse than the Dog Days in the half-dozen years before the pandemic: unemployment and underemployment are on the rise as in 2013-19, and the fall in real wages is worse than those years of stagnation.
“The public debt situation will worsen and the public finances will be under great pressure.”
Fellow economist Grudnoff said the government would need to react quickly to avoid even more devastating problems.
The Economist warned that welfare benefits and payments should increase, and if the government is not decisive in its response, those in need of food banks in Australia could rise as well.
‘If the government takes steps, we should not see the problem of food, but poverty will increase at all. There will be more people in poverty due to the recession in Australia.
“If the government doesn’t respond appropriately, we could see an increase in food banks and an increase in homelessness.”
However, he added that food is an essential element so the fall in demand will not be much.
Stores that don’t sell essential items are most at risk, and Grudnoff said some stores could lose business because of a drop in people’s income.
Falling jobless incomes could make it harder to pay energy bills, creating scenes that could mirror the scenes seen in places like the UK.
One economist has warned that benefits and welfare payments should increase and if the government is not decisive in its response, people in Australia needing food banks could rise as well.
Economist Mr Grudnoff said the government would have to respond quickly to avoid even more devastating problems such as food shortages.
However, Garnaut said Australia is in a better position than other countries.
“Fortunately, there is no need for a recession, even if the US, UK and EU land in that miserable situation,” he said.
“If the Reserve Bank takes seriously its legal responsibility to achieve full employment in the next period, we will avoid recession.”
His opinion was echoed by Professor Percy Allen from the Institute for Public Policy and Governance at the University of Technology Sydney.
“Australia is in a better position than the UK because our inflation is less aggressive, so our interest rate hikes are not going to do as much to slow the economy,” he told Daily Mail Australia.
‘However, our economy will slow down and unemployment will rise as interest rates rise and credit shrinks. Whether this will amount to a recession is too early to tell. If the Reserve Bank of Australia raises its cash rate to 3.0% or more, a recession is likely.
‘Finally, Britain is breaking through conservatism under the PM truce. His government has decided to eliminate its operating deficit (mainly subsidies in fuel prices and cut taxes, especially for those with higher incomes) to boost economic growth. At the same time, the Bank of England is hardening credit and raising interest rates to stymie growth to stave off rapidly rising inflation.
“It is like a driver putting one foot on the accelerator and the other on the brake. There is a high risk that this will create panic in the market with the pound falling further and capital fleeing the country.
“In contrast, in Australia, the government deficit is narrowing due to higher commodity prices and still strong trading conditions.”