The recession we don’t have to have

While we often prognosticate over the impact of aggressive interest rate rises on the housing market, the bigger worry is what happens to household consumption and the economy.

Household consumption is by far Australia’s biggest economic driver, typically accounting for around 55% of the nation’s growth. Therefore, where household consumption goes, the economy typically follows, as illustrated in the next chart:

Consumption versus growth

With mortgage repayments tipped to soar on the back of sharp rate hikes, there will necessarily be less money available in household budgets for spending on discretionary items, thereby slicing household consumption and growth.

Already, a new survey by NAB shows that Australian households are cutting back hard on spending in the face of soaring cost of living:

People right across the country are looking to make their money go further by cutting back on non-essential spending as well as bigger ticket items, the National Australia Bank research showed…

“We can see the impact of inflation starting to show with prices moving up and we know many Australian households are already feeling cost-of-living pressures. This research reflects the conversations I’ve been having with our customers – people are finding ways to make short term changes and get on top of their money”, [NAB group executive of personal banking Rachel Slade said]…

Around 40 per cent cut back or stopped buying micro treats such as coffees, snacks, and lunch, while one-in-three cancelled, delayed or made more modest travel plans.

But Aussies are also putting off bigger purchases with three-in-10 cancelling or delaying a buying a TV, fridge or washing machine…

For many Australians, a home loan repayment is a significant monthly cost, the NAB said…

The negative drag on household consumption from soaring mortgage repayments would also be exacerbated by an expected sharp fall in house prices, which would make Australians feel poorer.

It is also concerning that the Reserve Bank has commenced this monetary tightening cycle with Australia’s consumer confidence tracking below the trough of the Global Financial Crisis:

Australian consumer confidence

Thus, Australian consumers are already in a fragile state as they stare down the prospect of mortgage rates soaring to 6% or 7%, as projected by economists and markets.

If these rates ensue, household consumption will crash and the economy will very likely be pushed into an unnecessary recession. It would be the recession we didn’t need to have.

Unconventional Economist


  1. pfh007.comMEMBER

    “..If these rates ensue, household consumption will crash and the economy will very likely be pushed into an unnecessary recession. ..”

    Unlikely……..more likely is the following:

    1. The RBA will continue to raise interest rates as it cannot afford to get behind the inflation curve and there is a significant lag with monetary policy…plenty of history on why they might not want that to happen. Getting rid of inflationary expectations is very painful.

    2. If consumer spending actually does fall and as a result inflation peaks and starts falling the RBA will quickly sit on their hands or even reverse direction …if inflation allows.

    If anything the risks of the RBA getting behind the inflation curve are much greater because the RBA was encouraged to drive interest rates towards zero even though Blind Freddy knew that doing so would induce an even greater rise in household debt and land/housing prices. The RBA understands the household debt bubble better than anyone.

    It is truly unfortunate that the monetary policy maniacs spent so much energy demanding that the RBA drive an even larger private sector bubble of debt but the results we are seeing now were always predictable.

    Winding out levels of debt during a period of low inflation was always a game for fools.

    • pfh007.comMEMBER

      I see in the comments below that there is some uncertainty about what sort of inflation the RBA is dealing with.

      Bernanke’s discussion of monetary policy in his new book is interesting. He reckons there are three types that central banks should have regard to and they can all be happening at the same time to varying degrees..

      1. Supply shock inflation – external shocks

      2. Demand inflation – driven by fiscal, low unemployment and monetary policy

      3. Changes in inflationary expectations.

      It would seem bold to argue that the RBA only has number 1 to deal with when fiscal policy has been very loose and remains loose, unemployment is super low and monetary policy is near zero.

      It seems very likely that the RBA understand the presence of No 1 but are concerned about No 2 and that No. 3 will be coming up fast behind.

      And why wouldn’t they be concerned about No 2 and No 3?

      We have just seen one of the most cynical and opportunistic PM’s in recent memory attempt to buy an election by driving the economy white hot with every bit of policy available. I would not put it past him to have been pressuring the RBA and APRA the entire time.

      As Bernanke makes very clear, if Central Bankers wait until they are super sure about the existence of inflation they are likely to already have an inflation problem that will take a lot of pain to bring under control..

  2. The Grey RiderMEMBER

    We should have had 3 recessions since 1991…this one is well overdue and completely necessary.

  3. Goldstandard1MEMBER

    Actually, we really need to have this recession mate. Your position has no bearing on the economy needing a wash out.

    Why the hell would you choose giving up on inflation vs destroying over leverages ppl? Dumb. Thnkfully not going to happen.

    • “Why the hell would you choose giving up on inflation…”

      Pretty simple, really. The inflation has been caused by imported supply shocks and weather-related issues, not excessive demand. How will jacking up mortgage rates to 6% or 7% alleviate these issues? Answer: it won’t.

      The inflation would still be here even if the cash rate was already at 2.5%.

      Tell me I’m wrong?

      • Goldstandard1MEMBER

        You are wrong. What this situation has exposed is there is FAR too much debt in the system. So start there mate. Deep recession needed and get debt levels right. Fix energy for Australia and tell the central bank to do their job earlier. This issue was their innaction last 15 years. That is why we have no dry powder. Stop treating the SYMPTOM.

        Just so we are clear, you are choosing social unrest via inflation when masses can’t afford basics.

        • “Just so we are clear, you are choosing social unrest via inflation when masses can’t afford basics.”

          How does forcing up the cost of living via higher mortgage rates and unemployment help the masses “afford basics” when the cost of those basics are rising independently? If anything, it’s a recipe for social unrest.

          Please enlighten me?

          We obviously agree on fixing energy, however.

          • A lot of people are seeing unprincipled politics and policy needing a good hard reset, and term-upon-term, the politicians who have shown promise have been undermined by self interest.
            The commenters here are seeing this moment as a good opportunity to give the thing a good hard kick in the nuts and watch it hit the deck as political courage is no longer treated as a risk to parties. If the vested interests are licking their wounds then the rest of the economy has time to rebuild as sensible policy makers have the people back on their side again.
            I think that’s their point.

            “It has to hurt if it’s s to heal.”
            – The Neverending Story

      • Mate something had to put a break on this labour shortage. I had a woman yell at me the other day because her roof was leaking and I was the 20 something person she has rang and we all said we are too busy. It’s nuts, there is so much work to be done everywhere you look and the brakes need to go on.

        • Wage growth says otherwise. Sure, severe weather events have caused blowouts in trades people. But how will soaring rates fix the problem?

          As I keep saying, interest rates are a blunt demand management tool. They are next to useless against imported supply-side inflation or inflation caused by weather shocks.

          • You sure that inflation had nothing to do with the tens of trillions printed over the last few years?

      • You are wrong. But hey let’s play this long winded drawn out game where we pretend the solution isn’t the solution even though we have learnt this before by pointing out some tiny detail of the situation around supply shocks and demand push to make a point of how history is not EXACTLY repeating itself and just rhyming is not good enough.

        • I’ve read your comment three times and it still makes no sense.

          Answer me this: If the cash rate was already 2.5%, would Australia’s inflation be running way above target? Yes or no? If the answer is yes, then you have proven my point. If the answer is no, explain how so given petrol would still be $2 a litre, materials costs would still be elevated, and severe weather would still have pushed up food prices.

          Instead of writing a snarky smart arse comment, how about contributing to the debate?

          • No, well offcourse 2.5% would not abate it. Inflation at 8.5, go higher duh. You only have one lever.
            What else are you going to do? Solve world peace, convince commies to abandon convid zero AND wrangle the gas cartel all at once? Now who’s dreaming.

          • Righto. So you admit that hiking rates aggressively is useless in curbing inflation, but recommend that action anyway. By the same token, you claim I am “choosing social unrest via inflation when masses can’t afford basics”, even though rising mortgage rates will make affording those basics even more difficult while also driving up unemployment.

            Can you see where I am coming from now?

          • No I am saying you aren’t then hiking hard enough for demand to meet the supply problem you have and can’t do anything about.
            The alternative you have ends up here anyway. Just along the way, inflation eats away at the most vulnerable. WHO already gone out and said the poor countries are getting priced out of food supplies. Priced out of the thing you need to live!
            A point will come to choose between the vulnerable and the indebted. And you are actually on the wrong of history on that. Still arguing about how to keep the debt peddle slammed down. How is it you even get to be angry?

      • Hasn’t the lack of inflation over the last few years/decades also been caused by (excess) supply shocks? In which case, rates should never have been lowered this far in the first place?

        Anyways, that’s another argument.. but sure increasing rates will not increase the supply of oil, but it will reduce the amount of AUD available to be spent on oil (et al). Yes, it will hurt. But that’s the point.. if it ain’t hurtin’, it ain’t workin’.

        Demand is measured in dollars, and ‘we’ control the amount of AUD available to spend, and subsequently the prices (AUD) that markets clear. That’s the sole purpose of the RBA.

      • I think you are wrong, there would be less inflation if our interest rates were already at 2.5 percent , the AUD would be stronger meaning fuel prices would be lower, thats just the primary example.
        Historically energy price crises have been solved by expanding supply, not by financial engineering, example of 2008, recession only temporarily crashed oil and it went right back up to around 100 dolllars a barrel , massive expansion of shale supply finally crashed the price around 2014, late 70s was a similar scenario with the massive expansion of offshore oil fields through the late 70s early 80s keeping prices low for 20 years. Yes we should have a nationalised oil and gas conpany , like norway, malaysia indonesia Saudi Arabia, , Australians like to scoff at some of these countries but real inflation is a lot lower as is debt, fuel prices become another financial tool similar to interest rate rises.

      • But if there’s less supply due to supply shocks, then the current level of demand *is* too much. That’s why prices go up. Until supply can rise, demand must come down, and that will happen either via tightening monetary policy or inflation, the result of both is that people can’t afford as much stuff.

    • Frank DrebinMEMBER

      Unfortunately, pretty much everything in Australia is dead wood.

      It is applying a match to a tinder pile and at the end of it the large aggregation of industry control will end up in hyper aggregation as those remaining scoop up the rest.

      • Jumping jack flash


        According to latest figures it is 60% of the US economy. It would be similar here. All spending debt on consumer items.

        Of course the spending of debt is incredibly useful because it keeps everyone employed and earning far higher wages than they would be if there was no debt to spend.

        Take away the debt by all means, but unless we have something to replace it with that isnt debt, say, manufacturing of useful items we sell to the world for profit, then all we’re doing is cutting off our nose to spite our face.

  4. Ronin8317MEMBER

    I’m surprised there are so many people who believes in Austrian economic theory of ‘Boom and Bust’, even though it fails in both theory and reality. It’s merely a morality fable.

    Until oil prices crash, the world face an inflation problem, and interest rate needs to follow because that’s what the bond markets demands. The RBA have very little choice in the matter.

    • Actually, inflation would only be temporary unless oil prices continue to rise. Petrol stuck at ~$2 a litre would be a one-off shock and CPI would return to trend (other things equal). It would be like when the 10% GST came into effect.

      • Ronin8317MEMBER

        Let’s hope so, but the war in Ukraine is not ending anytime soon, so the problem has moved to one of economics to geopolitics. Russia is “winning”, so the pressure for Europe to stop importing oil from Russia will only escalate, When Europe finally stops buying from Russia later in the year, they will have to buy from someone else. There will be a mad scramble for non-Russian oil, gas and coal, and that will push oil prices past $200 a barrel. The EU government throwing money at people to compensate for high energy prices only makes inflation worse.

  5. DingwallMEMBER

    So effectively we want house prices to keep going ballistic, interest rates to stay low forever and the AUD to be as high as possible. Good times ……forever…..and ever. Oh and the government to redirect funding to FHB’s and import as much immigration as possible to keep houses getting bought. High wages will be a necessary sacrifice except for the primary wealthy beneficiaries of this Australian economic model.
    Also we cant afford for any interruption to this model as we will go into recession ….. A no-no