The probability of an Australian recession is estimated at only 10 per cent over the next year in the eyes of Commonwealth Bank of Australia economist Michael Blythe, who argues the one-in-three risk that some experts have predicted is too bearish.
Subscribe now for unlimited access.
$0/
(min cost $0)
or signup to continue reading
Even though no prominent economists have forecast outright a recession for the Australian economy, the collapse in commodity prices and slowing growth have prompted discussion about how bad conditions will become.
Forecasters who have outlined that recession is a real danger for the domestic economy include the Nobel prize-winner Paul Krugman - who said a recession was something Australia had to be "prepared for" - and Goldman Sachs economist Tim Toohey, who predicted a one-in-three chance of recession.
Mr Blythe said financial markets were only pricing in a 10 per cent chance of recession and "some of the arguments for recession look weak on closer inspection”.
This is because policy settings in Australia are accommodative, the RBA has the capacity to ease rates further, the currency is low enough to cushion growth and some parts of the economy are sufficiently strong to offset some of the loss in mining investment.
While public infrastructure spending has been poor, Mr Blythe pointed to the boom in residential housing construction, which had created enough jobs to exceed the number of jobs lost to the mining slowdown.
However, most concerning was the health of incomes and this posed a recession risk through the possible tightening of spending, as well as creating an incentive to invest to compensate for weak wages. “This impulse can inflate asset price bubbles. "The China-commodity story is the key," Mr Blythe said.
ANZ economists expect the Reserve Bank to cut official interest rates to a new record low of 1.5 per cent next year in response to a worsening global economy and stubbornly high unemployment. Previously, the bank's economists had forecast the RBA had finished cutting rates and would remain on hold.
ANZ economists Warren Hogan and Justin Fabo on Thursday argued that the extra support would be needed to boost an economy still suffering from a plunge in mining investment.
Citigroup's top economist, Willem Buiter, warned of a global recession in two years, led by China. – AFR, SMH.