Equity Trustees: 20% chance of recession in Australia

With weakening consumer confidence driven by growing pressures of cost-of-living and rising interest rates, there is a 20% chance of recession in Australia in the next 12 months, according to Equity Trustees Asset Management’s investment specialist Grant Mundell.

The firm also expected that the focus will start to shift in this earning season from inflation and interest rates more towards economic growth and company earnings.

But this will mean that of the economic growth slows as anticipated, then this will be likely to flow through to lower corporate earnings.

Mundell said that consumers will definitely feel the pinch from a combined impact of rising interest rates and substantial increases in prices for household items such as energy and insurance, rent and general goods and services.

On top of that, many three-year fixed rate mortgages are expected to roll off over the next six months while tighter lending standards will affect the flow of credit to households and businesses leading to slower discretionary spending.

However, Mundell said, Australia does have some countervailing positives with high levels of relative migration providing a stimulus to demand and Government spend is forecasts to remain robust.

“Another swing factor will be the direction of commodity markets which will in turn be heavily influenced by policy decisions and demand from China,” he noted.

In terms of sectors, the manager stressed that in more difficult conditions it was beneficial to focus on basic micro factors as to “what makes a good business and investment.”

As far as Australian equities were concerned, Equity Trustees remained positive on general insurance, lithium and supermarkets.

At the same time, the firm warned that there would be significant headwinds in this earnings season, as companies might find it more difficult to pass through cost increases compared to the past two reporting seasons.

“This will become harder to achieve going forward and therefore company margins and earnings may disappoint,” Mundell concluded.