High rates, possible recession: Market watchers predict tough 12 months

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Some of Australia’s top market watchers expect Australia could enter a recession in the coming year and interest rates will stay higher for longer in a raft of predictions for the financial year ahead.

The country’s most experienced economists and fund managers believe it could be a bumpy ride for investors over the next 12 months, with most saying there is a reasonable chance of Australia entering a mild “technical” recession – defined as two back-to-back negative quarters of economic growth.

AMP’s Shane Oliver puts Australia’s chance of falling into recession at 45 per cent.

However, the odds of a recession shortened after the Reserve Bank of Australia lifted the cash rate 0.25 percentage points to 4.1 per cent on Tuesday, an 11-year-high. Market watchers expect those high rates will persist, with inflation proving more stubborn than anticipated.

Rapidly rising prices are not only bad for the economy but also for investment markets, sapping not spending power of consumers and weakening economic growth, but also making it harder for companies to grow their profits.

Mortgage stress is also increasing, with those who took fixed-rate mortgages two or three years ago rolling off to much higher variable mortgage rates, while the cost-of-living pressures continue to mount.

The RBA is trying to navigate a narrow path between increasing interest rates to fight inflation, without pushing Australia into recession, says Shane Oliver, chief economist at AMP.

He says it is “quite possible” that if our central bank keeps increasing rates a recession could result. “Every time the RBA increases interest rates, the risk [of recession] is increased,” Oliver says.

He puts Australia’s chance of falling into recession at 45 per cent; though his “base case” is a soft landing.

Simon Doyle, chief investment officer and head of multi-asset at fund manager Schroders Australia, says as “we go through the next financial year, cracks in the economy will start to open; we will likely see weaker equity markets”.

Doyle’s “starting assumption” for the coming financial year is for Australia to fall into recession as the full effects of higher interest rates impact discretionary spending. He expects the jobless rate in Australia to rise, albeit from a low rate now, even if we avoid recession.

“The harsh reality is, to get inflation down the RBA needs to see weakness in the labour market to take pressure off wages,” he says.

Prime Value’s ST Wong says it could be up to two years before interest rate start to come downCredit: Eamon Gallagher

Doyle says investors should be thinking of the longer term. He says experience shows those investors who switch from shares to cash tend to do so at the wrong time, only to lock in losses and miss out on the recovery.

ST Wong, the chief investment officer at fund manager Prime Value, expects interest rates to stay higher for longer. “Although they may not go much higher, it could be the best part of two years before they start to come down,” says.

Elevated interest rates are good for those who have more of their money in cash, such as retirees, with cash paying more, Wong says.

While there is unlikely to be any easy money made from shares over the short term, patient investors will continue to be rewarded over the longer term, Wong says.

Brian Parker, chief economist at industry superannuation fund Australian Retirement Trust, says there is more cash sitting in bank accounts than before the pandemic. However, a lot of that money is in the hands of middle and upper-income earners, rather than the less well-off.

Consumer spending will likely slow, with more people hurting from higher mortgage rates and higher costs of living, he says.

However, markets tend to be forward-looking and a lot of the less-than-rosy picture has been factored-in by investors, he says.

Parker says there is no need for those whose personal circumstances are unchanged to be concerned about their retirement savings.

“Superannuation is a long-term investment and fund members will see many recessions and major market downturns,” he says. “The one thing they have in common is they always end.”

  • Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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