Is a recession coming to Australia this year?

Interest rates have been pushed up both here and abroad this month. Is the economy about to crash and burn?

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Share markets and the general public are still catching their breath after massive interest rates increases this month.

Inflation is rampant, and monetary authorities here and around the world are wrestling to get it back under control.

In Australia, a fortnight ago the Reserve Bank hiked its cash rate by 50 basis points, which was the biggest lift in 22 years.

And this week, the US Federal Reserve pushed its rate upwards by a whopping 75 basis points.

Central banks are deliberately trying to slow the economy down. But they may have left their run a bit late, meaning they have to implement more dramatic rate increases. 

And that could spook their countries into recession.

Recession likely in US and 40% chance in Australia

BetaShares chief economist David Bassanese is now convinced the US is in trouble.

“I now foresee a US recession within the next 12 months,” he said on a BetaShares blog post.

“Indeed, US economic growth was negative in the March quarter — and there is now a reasonable chance that June quarter economic growth will be negative also, reflecting weakness in business investment and consumer spending.”

But what about Australia?

There is an old finance cliché that when the US sneezes, Australia catches a cold.

And this situation is no exception, according to Bassanese.

“Consumer sentiment has already tumbled and house prices are starting to weaken,” he said.

“While I am still hopeful the Australian economy can avoid recession, it is at least a 40% risk in the coming 12 months.”

What does this mean for the share market?

The prospect of recession is unambiguously bad news for stocks.

Bassanese expects the US to suffer from a bear market over the next year.

“Wall Street does not yet seem priced for recession, and there seems scope for equity markets to fall further,” he said.

“My base case is the ultimate peak-to-trough decline in the S&P 500 Index (SP: .INX) will be 35%.”

ASX shares will not be spared from ignominy.

“The local share market will not be immune to further Wall Street weakness, especially as we also face uncomfortably high inflation and likely aggressive RBA rate hikes in coming months,” said Bassanese.

“Our sharemarket will likely follow the US into bear market territory, with at least a 20% peak-to-trough decline likely in coming months – that implies a decline in the S&P/ASX 200 Index (ASX: XJO) to at least 6,000.”

The bright side is that the coming months will present “good buying opportunities”.

“For investors, periods of US recession and associated bear markets can be difficult periods to endure,” said Bassanese.

“But the lesson of history is that markets do eventually bounce back.”

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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