Is a recession inevitable in Australia?

With consumer confidence levels dropping below GFC levels, many speculate that a recession in Australia is inevitable. However, the likelihood of such a recession can be determined through Australia's inflation rates and how the government manages them and Australian exports.


As of September 2020, inflation in Australia is at 6.1%, the highest since 1990, whilst CPI has increased by 1.8% since last year. This is a direct result of the stimulus packages (JobKeeper, JobSeeker, etc.) as well as the restrictions on supplies available caused first by COVID-19 restrictions, then to a lesser extent, the Ukraine war. To mitigate inflation, the best policy is to increase interest rates, incentivising individuals to save, resulting in decreased demand for goods and services, reducing inflation. The danger of not increasing interest rates against inflation can be clearly observed with Turkey. Despite continuous inflation in the country, President Erogan continually decreased his country's interest rate - decreasing interest rates in August from 14% to 13% - which is part of the reason Turkey now faces a 79,6% inflation rate. Therefore, if necessary, the Australian government must ensure the interest rate is raised enough to reduce inflation. Another method to bring down inflation is through tight fiscal policy. Reducing government spending will directly decrease total spending, lessening inflation. This can be done by cancelling projects which bring little value to the community, reducing wasted monetary input.


Australia is called the lucky country for a reason: large mineral deposits, especially with iron ore and coal despots, have become a cornerstone for the Australian economy. Mineral extraction makes up for over 11.5% of the Australia economy, the second largest industry behind health and education services which account for 13.2%, and is directly responsible for defining Australia as a net exporting nation, with 70.7% of resource-based exports. This has directly strengthened the value of the Australian dollar and the wealth of the everyday Australian, justifying how Australia is ranked 5th in the HDI index.


Source: AFP/Christian Sprogoe

To determine if a recession is in store for Australia, it is ideal to inspect the economic status of Australia's main exporting partners. The vast majority of Australian minerals are bought by East Asian nations, those being China, Japan, and South Korea at 36.0%, 12.2%, and 7.1% respectively. At present, the growth of China's economy is slowing due to both extreme COVID-19 lockdowns and lower demand for Australian iron ore. Despite this, both Japan and South Korea are continuing to use Australian coal and natural gas, with two-thirds of Japan's coal and one-third of their gas originating form Australia. Additionally, as a growing economy India will likely require Australian materials in the future to further urbanise. Therefore, Australian exports of raw materials, despite setbacks in China, are still strong in other areas of the world and have the potential to increase in India.


As such, a recession in Australia is possible but can be avoided if the appropriate measures are taken by the RBA, whilst new and exporting partners are maintained.


 

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