Global turmoil to hit home

Recession is ‘probable’

TURMOIL in the global economy has tipped Treasurer Jim Chalmers’ expectations of a global recession from “possible to probable”.

The Reserve Bank of Australia has dished out a series of aggressive rate hikes over the past five months as it tries to rein in rampant inflation.

Economists widely expect the central bank to hike the cash rate by another 50 basis points when it meets on Tuesday, up to 2.85 per cent from 0.1 per cent in May.

Since the RBA board met last month, global interest rates have lifted significantly, with Mr Chalmers conceding the situation was “dangerous and difficult”.

“Inflation numbers with a six in front of them or even a seven are incredibly concerning,” Mr Chalmers said.

“If you look around the world, even in some countries where inflation has come off the peak, it’s still extraordinarily high by historical standards, so we’re not out of the woods by any measure when it comes to cost of living.

“The global situation has deteriorated dramatically in many of the major economies that we monitor most closely. The chance of a recession has edged over from possible to probable.”

Australia wouldn’t be spared should there be a global downturn, he warned.

Speaking with the Australian Financial Review, AMP Capital chief economist Shane Oliver put the chance of a domestic recession at close to 40 per cent.

Last week, financial markets were rattled by the UK government's announcement of the biggest tax cuts since the 1980s alongside billions of pounds of additional cost-ofliving support. The Bank of England was forced to step in to purchase government debts to avoid a crisis, as the British pound slumped.

Mr Chalmers, who is just weeks out from handing down his first budget on October 25, said the fallout was a “cautionary tale”.

“I think this is a cautionary tale about the costs and consequences of getting government policy and central bank policy out of whack, having fiscal and monetary policy working at cross purposes,” he said.

Economists at three of the four big banks expect the RBA to raise the cash rate by 50bp on Tuesday.

The Commonwealth Bank is the most dovish, predicting rates will tap out at 2.85 per cent in November after a 25bp rise on Tuesday.

But Westpac chief economist Bill Evans said homeowners should expect rate hikes to continue, to peak at 3.6 per cent in February 2023.

“Rate hikes are expected to continue out to February 2023 as the December inflation report is likely to show consumer prices lifting strongly in the December quarter. We expect a 2.5 per cent jump in the headline and a still hefty 1.2 per cent rise for underlying inflation,” he said.