Since the advent of the pandemic, nothing has been going right for the global economy. Though efforts have been made for reducing the negative impact of worldwide slowdown, the desired financial effect has not been achieved yet. A recent survey indicates a potential recession in Australia in the near future, as foreseen by a majority of industry experts.
The survey reached out to numerous firms and garnered 115 responses in total. In comparison to previous reports, this year’s respondents distinctly exhibited more pessimistic sentiments about the economy, a trend described in financial circles as being resoundingly more bearish.
The KordaMentha and Turnaround Management Association (TMA) Australia 2023 Survey report underscored that the attitudes among professionals have experienced a significant decline within a relatively short span of time. The participants in the survey were mainly concentrated in Victoria, accounting for 43% of the responses. Additional viewpoints originated from New South Wales (36%) and Queensland (12%). The remaining states collectively contributed 9% of the expressed opinions.
- One of the prominent findings revealed that 70% of those surveyed believe that a recession could occur within the upcoming 12 months, including 19% who foresee this happening within the next six months.
- Digging deeper into the data, it was noted that 51% of the participants have a likelihood expectation of an Australian recession in the next year.
- Approximately 47% of the participants predict that inflation will remain stable at its current levels over the upcoming 12 months, whereas a third of respondents hold the belief that inflation will persistently rise.
- The report highlighted the contrast with September 2022, when only 27% of respondents had anticipated the possibility of a recession.
- The projections indicate that the year-ended Gross Domestic Product (GDP) growth is anticipated to reach its lowest point at 1 percent towards the close of 2023.
- Subsequently, it is expected to incrementally improve, reaching around 2.25 percent by the conclusion of 2025.
- The RBA’s forecasts also suggest that inflation is likely to re-enter the bank’s target range of 2 to 3 percent by the middle of 2025.
- Alongside this, there is an expected increase in the unemployment rate to 4.5 percent.
The prevailing anticipation among respondents is that the potential recession in Australia might be the outcome of the interplay between inflation and increasing interest rates as these dynamics reverberate through the economy. This situation is further compounded for businesses due to the tightening of conventional debt and equity markets.
Earlier this week, Stephen Halmarick, chief economist of Commonwealth Bank highlighted that although the economy was already displaying signs of strain, the impact of the Reserve Bank’s consecutive interest rate hikes in May and June, resulting in a total increase of 0.25 percentage points each month, had not yet been experienced by mortgage borrowers. In simpler terms, households will need to become more financially cautious in the upcoming months as retail spending continues to decline.
Businesses are also facing significant pressure, as indicated by the survey results. The five sectors most severely affected by these challenges are construction, consumer discretionary, commercial real estate, healthcare, and residential real estate. The primary contributors to financial strain on businesses are the escalating costs and wage hikes. This situation is particularly challenging for sectors that cannot pass on these increased costs to consumers either due to contractual obligations (such as construction) or weak consumer demand (like consumer discretionary and commercial real estate).
Obtaining financial resources through conventional methods of borrowing money or selling company ownership has become more challenging. However, certain non-traditional sources of funding are becoming viable for certain individuals or businesses. Despite the larger economic trends influencing this situation, lenders are placing even greater significance on Environmental, Social, and Governance (ESG) factors when making funding decisions.
The prevailing sentiment among organizations has shifted noticeably. Initially centered around achieving revenue growth in a low-interest-rate setting, the focus has now pivoted sharply towards stringent cost control. As company balance sheets show signs of weakening, meticulous attention is being directed towards the performance of individual business units. This has led to a growing consideration of options such as divesting from or shutting down underperforming business units.
The results of the 2023 survey indicate that businesses are facing current economic challenges and need to focus on strategies for both increasing revenue and reducing costs. Interestingly, the significance of actions involving the divestment or closure of business units has notably escalated.
- 59% of participants considered cost reduction initiatives highly important, a number that has risen to 84% this year.
- On the other hand, revenue growth initiatives were slightly less prioritized this year, with 36% of respondents deeming them highly important compared to 48% in 2022.
- This year, 80% of those surveyed believe these actions hold moderate to high importance, a substantial increase from the 51% reported in 2022.
National Australia Bank’s economists are not projecting a potential recession in Australia in the foreseeable future. Alan Oster, Chief Economist at NAB, shared his perspective, stating that as of now, their best-informed prediction suggests that consumption will remain steady during the June quarter. He also mentioned that the economic forecast for the June quarter has been slightly adjusted upward due to export activities. Oster further conveyed that a noticeable economic improvement is not expected until interest rates are reduced, and there’s a modest recovery in the global economic environment. The bank is closely monitoring the health of China’s economy, which is considered a significant risk factor for Australia’s economy.
The Reserve Bank of Australia is also keeping a close watch on global economic developments, with particular attention to China. The latest meeting minutes from the RBA highlighted the downward revision of China’s economic outlook and the high level of uncertainty associated with it. The recovery of household consumption and the effectiveness of policy measures, especially in the property sector, will significantly influence China’s economic trajectory. However, there is no anticipation of a potential recession in Australia throughout the projected period.
The Reserve Bank of Australia (RBA) stated that members of the bank noted an anticipation of the economy growing significantly below its usual pace in 2023. This expectation is attributed to the pressures of rising living costs and increased interest rates which are expected to dampen overall demand. The RBA forecasts indicate that although output growth is projected to rise, the increase will be gradual. This growth is expected to be supported by a reduction in the aforementioned challenges and a boost in household wealth due to a positive shift in the housing market.