Key points:

  • The United States halfway through the recession and why.
  • Is US data an indicator of what’s in store for Australia this year and why?
  • Forecasting the risk of recession in Australia.

US GDP fell 1.4% in the first quarter. While the market was expecting positive growth of 1.1%.

It’s a big miss.

We had predicted a recession in the United States for this year, and suddenly the United States is halfway there?

Consumer spending and fixed investment saved the day as the only bright spots, but these are precisely the sectors of the economy that we now expect to decline sharply.

Admittedly, inflation is helping push up consumer spending data in the near term, because for a while people continue to buy as they are used to. As mortgage rates begin to rise with the Fed hikes and more generalized inflation settles towards 10%, maybe even 12%, then at some point the consumer will pull out completely.

Remember that consumer confidence is already at the GFC level and has fallen sharply. It was only rising fuel and shopping prices that kept consumer spending seemingly firm.

Q2 data may bounce back a bit, but it’s more Q3 and Q4 that worries me. Hopefully it won’t be four consecutive quarters of negative growth this year. Yet it is now a possibility. Imagine that, and when all the companies on Wall Street had forecast a boom in 2022.

Our fundamental argument for recession risk remains simultaneous extreme inflation and a delayed aggressive rate hike cycle that will cool the economy far more than actual inflation. To be honest, the Fed just doesn’t get it.

For Australia, the implications are very real as it is not just the United States that is heading into recession. Europe is a done deal on that front, and China probably can’t avoid a short-lived recession now.

Although commodity prices are high and everyone is happy about it, that’s probably the only positive. The hangover from too much stimulus, the highest number of cases per capita in the world even though we had relatively low case numbers (no wonder we had a temporary boom) and crisis interest rates when there was no crisis all sucked the economic activity of the next two years to the two years we have just seen. Hence my economic cliff warning.

Inflation will continue to climb and the RBA so late will raise rates.

The real estate bubble that no one wants to talk about is going to be put to the test. If it shrinks too much, or God forbid, bursts out, then the Australian economy will be in its own recession by the end of the year. It doesn’t matter who wins the federal election.

This recession, there will be at least a marked downturn, but the recession is now clearly on the table, will only have happened for two very clear and specific reasons:

  1. Extreme government stimulus that has been grossly exaggerated.
  2. An RBA solely responsible for runaway inflation, a housing bubble that needs to be deflated somehow, and now more aggressive rate hikes than they should have been necessary due to their start. late.

And let’s be clear here. It was obvious last year. The RBA has no excuse and any effort to act with surprise and blame Ukraine would only confirm its utter incompetence.

We have to recognize that our Australian central bank is not well rated internationally. Why do we flatter it like it’s some kind of church. It smacks of the insecurity issues of small nations, which so many commentators feel compelled to pay tribute to rather than criticize. We need to change this strangely Australian financial markets culture. It does not exist elsewhere.

Wake up Australia!

One of the greatest failures of the current federal government is to have left a driver asleep at the wheel of our critical and wet vehicle of economic policy.

No, there is no “it’s independent” excuse. The Federal Government can intervene and the OECD study clearly concluded and recommended that an “urgent” review of the current RBA board and its charter be undertaken. The federal government should immediately fire the board of directors and appoint a governor from outside the bank.

If we go into a recession, we have only ourselves to blame for not speaking up and having a good central bank board and a good governor who might know what they are doing.

The current harvest is a national embarrassment and Australian taxpayers deserve better.