Is Australia entering recession?

Oksana Patron

7 June 2023

With the equivalent of Q1 gross domestic product (GDP) data for Australia expected next week, economists remain divided with forecasts focusing on whether the country’s recession has already started.

According to Franklin Templeton, two major banks expected GDP to stand at 0.2%, one investment bank predicted 0% and another one expected -0.2%.

According to Andrew Canobi, Franklin Templeton Fixed Income director, this means that GDP growth was quickly declining and is driven down by weaker consumption.

Retail sales, which is a significant element of domestic consumption, already saw its largest quarterly decline in Q1 2023 since 2009, excluding COVID, after factoring in a fall in volumes adjusted for inflation in Q1.

Canobi said that although spending on services had been more resilient, all the warning signs indicated that Aussie consumers were ‘fast retrenching’.

“The retail trade volume contraction is even more alarming considering the strong population growth in Australia (running at close to 2% annualised) compared to the US,” he said.

He also stressed the stark contrast between Australian and American GDP growth which was underpinned by more resilient the consumption component, lower household leverage, better insulation from rate rises thanks to long-term fixed rate mortgages and positive drivers from employment conditions.

“The US economy is slowing for sure and the punitive credit conditions are weaving their way steadily through the economy. But the US consumer has been more buoyant so far than the beleaguered Aussie,” Canobi added.

“Both economies are slowing but Australia is doing so more quickly. That is more alarming considering that population and labour force growth is going to materially outpace the US (again) this year which should act as a support for headline GDP.”

Canobi also noted that there were chances that the results of overtightening by the Reserve Bank of Australia (RBA) would become clear on Q3.

“We don’t know whether the GDP result will be north of zero or not. And of course, a recession is defined as two consecutive quarters of negative growth.

“With Q4, 2022 being tepid though, a result for consumption in Q1 2023 that’s close to zero or only marginally positive represents a sharp deceleration in the engine room of the economy. If it’s negative, the storm clouds are already here.”