Kohler: Lunatic RBA will drive Australia into recession

Earlier this month I argued that the Reserve Bank of Australia’s (RBA) aggressive interest rate hikes risk delivering “the recession we don’t have to have”, by smashing household consumption and ergo the economy.

Today, Alan Kohler has taken a similar position, arguing that “a recession we don’t have to have is coming, and it will be the RBA’s fault”:

As we end one financial year and start another, it looks impossible to avoid a recession…

The RBA has spent 18 months all but promising to leave the cash rate at 0.1 per cent until 2024. Governor Philip Lowe even talked about the historic opportunity to see how low we could get unemployment.

He’s now protesting that the promise was conditional, but as you’d expect borrowers ignored the conditions – if they even heard them – and borrowed anyway…

Both the Federal Reserve and the RBA have turned on a sixpence, from smiling benignly and welcoming a bit more inflation to sprouting horns and talking about raising interest rates rapidly…

Australia’s credit build-up, with a 20+ per cent rise in house prices last year, has been bigger than just about anywhere else, at least partly because of the RBA’s “promise” not to raise interest rates until 2024.

In the circumstances a hard landing – recession – seems inevitable…

Yes, interest rates need to be brought back to something approaching normal, but slowly, and accompanied by much gentler rhetoric.

If there’s a recession, as seems inevitable, it’ll be one we didn’t have to have and it will be all the RBA’s fault.

I obviously agree with Kohler’s diagnosis. Never before has the RBA commenced a rate hiking cycle with consumer confidence so low – at levels not seen since the early-1990s recession (not including the brief period in early 2020 when the nation went into lockdown):

Long-run confidence

The rate hiking cycle has begun with consumer confidence already in the gutter.

Household consumption is the Australian economy’s engine room, accounting for around 55% of the nation’s growth on average. Thus, where household consumption goes, the economy usually follows:

Consumption versus growth

Household consumption drives growth.

With Australians among the most indebted in the world, and mortgage repayments tipped to soar on the back of sharp rate hikes, there will be much less money available in household budgets for spending on discretionary items, thereby slashing household consumption spending and growth.

Household consumption will also be pulled lower by falling house prices, which will make Australians feel poorer and less likely to spend.

The RBA, therefore, needs to proceed cautiously with rate hikes. If it follows the economists’ let alone the futures market’s interest rate forecast, and hikes rates too high too quickly, then the RBA will very likely push the Australian economy into an unnecessary recession.

It would indeed be the recession Australia didn’t need to have.

Unconventional Economist
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Comments

  1. DingwallMEMBER

    With Australians among the most indebted in the world,

    I suppose that’s the RBA’s fault too? The RBA has faults dont get me wrong, but when successive governments over the decades have destroyed, for example, manufacturing and basically forced Australians to be subservient to the sacrificial alters of real estate, this is what you get. The symptoms keep getting poked …. Fix the root causes …. Destroy this real estate obsession, get Australians investing in real industry and innovation

    • Yes, past governments policies have put is into a weakened position, and forced the RBA into a corner, so isn’t the present government working with the RBA instead of just leaving it in the corner with it’s blunt instrument?

    • Leroy Huggins

      High migration drives high demand. Induced migration scarcity means people have to be keen to secure a home. Where people are keen to be drawn in, investors will come along for the ride. It has more to do with migration than government tax and other policies. Where demand & supply are in relative balance slow to no real price growth… no price growth, tax/wealth benefits don’t exist (are much less). Thus low migration solves the issue of both demand AND tax policy.

  2. Agree. Why isn’t the government working with the RBA to fight this inflation without killing they economy. Would it not be far better to use other policies eg reducing GST temporarily to counter the rapid rise of “excess” inflation component? Or just pull the trigger, enforce a windfall profits tax etc all these would keep the economy stronger. The government not working with the RBA is sheer stupidity.

    • Would there be gov’t spending cuts to go along with this GST cut? If not, then that will just increase the currency supply and drive even more inflation.

  3. Mike Herman TroutMEMBER

    So the RBA doesn’t raise rates while the rest of the world does, the AUD falls and we start importing inflation… I for one can’t wait to be the first to purchase a $20 iceberg…

  4. I hope we do go into a recession. It’s the recession we have to have because we didn’t want to have it earlier.
    This recession will hopefully kill off our real estate obsession, clear out any zombie companies left over from COVID, finally return city commercial property to realistic prices, kill off the 99 thousand cafes and restaurants hiring “skilled workers” paying cash in hand and hopefully trigger our government to invest in getting manufacturing and real industries up and running in Australia.

    • Jumping jack flash

      Indeed. 20 years of interest rate manipulation and 20 years’ worth of false demand it created needs to be unwound…

      But hey, its not like we didn’t all benefit. Without the false demand created by the 20 years of debt spending we’d all be wallowing in 15% unemployment. Probably more. Despite Howard’s redefinition of employment.

      “hopefully trigger our government to invest in getting manufacturing and real industries up and running in Australia.”

      It has to be national industry. Private sector is toast for at least the next 5 years if this correction goes ahead.

    • Its what needs to happen but cannot see govt at any level making it happen at the collapse. Perhaps consumers/investors will make the changes needed and govt will eventually regulate in catch up mode.

  5. We all loved when the money spigots were cranking. It allowed the 2 & 20 party to continue. Everyone benefits, and no one pays.
    But, to quote Jens O. Parson: “In the later inflation, on the other hand, the effects are all bad. The government may steadily increase the money inflation in order to stave off the latter effects, but the latter effects patiently wait. In the terminal inflation, there is faltering prosperity, tightness of money, falling stock markets, rising taxes, still larger government deficits, and still roaring money expansion, now accompanied by soaring prices and ineffectiveness of all traditional remedies.
    Everyone pays and no one benefits.”

  6. From a speech by the Chief Economist of the RBNZ this lunchtime:

    Since August 2021, the Reserve Bank has been tightening monetary policy, lifting the Official Cash Rate, to rein in inflation. This will likely see actual house prices move back towards sustainable levels….For several decades, we have traded houses among ourselves at ever-increasing prices in the belief that we were creating prosperity. But the tide may well have turned against housing being a one-way bet for a generation of Kiwis.

  7. Diogenes the CynicMEMBER

    The answers lie back in time…was that Flawse? If you are designing a competitive, modern economy you want cheap land, cheap energy, cheap raw materials, competitive and smart productive labour pool (not fake unskilled migration), high taxes on unproductive assets/low taxes on productive assets including workers, protective industry policy designed to incubate world leading industries. Australia has none of these (mining perhaps excepted). We could have them but it requires a complete reboot. If RBA raises interest rates into the stratosphere we might get the conditions for a reboot, so bring it on.

    • Grand Funk RailroadMEMBER

      That was Flawse. I’d love to see him back here to be honest.

      The answers do lie back in time. But someone real soon is going to have to undo a lot of time in a policy sense to get us out of the merde we are in

      • Camden HavenMEMBER

        You imply that there’s a choice. It’s the choice that has been made that lies back in time.

  8. Before any of these people talk they should have to put a disclaimer about any RE investments they may or may not hold… that should go for MB team also…

  9. Hey but what happened to “they won’t let ihouse prices collapse”.
    Don’t you have a little faith at the pointy end?

  10. We need a recession… big time. For far too long, greed in real estate has distorted housing prices to the point of destroying the social fabric of Aussie society. Kill this stupid property market now. Interesting how those that have benefited from this craziness never or rarely talk about those left in the side of the road as spectators, and look on at this absurdity. We need to pivot from a nation of property moguls to actually one that looks after others and build stuff instead of working on our own self-centred ness. High house prices have destroyed young peoples dreams of home ownership. They suck too much money out of people, many of whom can least afford it, destroying whatever disposable income most have. It is nuts and must stop. Raise interest rates fast and smash this lunacy. Many that have been locked out of the housing dream will not be losing sleep over raising rates. And those that do, have had it good for way too long. It’s time those that have been forgotten about are now considered, even if indirectly, which raising rates is. Bring it on. Suck it up investors. You’ve had it good for way too long at other peoples expense. When all a lot of people want to do is to buy a little shack that doesn’t cost a fortune to call home, and can’t even do that, you know something is savagely wrong. Bust this nonsense and send greed to bankruptcy.

    • Australia is a lifestyle country, we dont want to turn it into a sh!thole so houses become cheap but we do need to reset peoples obsession with the asset class. Unfortunately, there is no nice way to correct this, the investors and wealthy property owners (boomers mostly) will be the least affected as they have seen the biggest gains and have the biggest equity to draw upon.

      I would rather not see a massive collapse and rather see APRA and GOV policy via ATO make changes which will take the asset class out of the desirable category. Over time, the heat comes out and young peoples lives dont get destroyed.

      We want boomers investing in their kids businesses, not in their kids 1st home.

      • Bring on a massive collapse. We don’t need to save the people who have prospered off sky high prices. We need to focus now on those ignored and left behind. It is well overdue. Boomers have proven they would sell out this country to overseas interests for personal selfish gain…we don’t need their input. The same ones who have profiteered cared not for those only seeking a house to call home, and not for wealth creation. Australia has already become a sh1thole because of this growing wealth gap. Bring on a massive bust.

  11. Jumping jack flash

    All this could have been avoided had they not pulled the pin on the hyperinflation.
    Just saying.

    They spent a couple of trillion on [COVID] stimulus, said the resulting inflation was “transitory” to not arouse suspicion, scheduled rises in the minimum wage, and then all that needed to be done was wait for the impending wage inflation to inflate away the debt… simple, and effective, and something that they’ve done for the past 30 years. When I was a kid I could buy an entire pie for $1, now I can’t even buy the sauce for a dollar.

    But no. They started raising interest rates! And so we once again launch into a 2007esque scenario… our glorious banking overlords sure have short memories.

    By 2024/5 we will be back to being in a similar position as we were in 2010. Good luck everyone.

    Hopefully a couple of bank failures in the next 6 to 8 months may shock them into reevaluating their current master plan.