US based PGIM manages more than $1 trillion in equity, fixed income, real estate and other investments.
PGIM’s president and CEO, David Hunt, gave a presentation to The Australian’s Strategic Business Forum in Melbourne, which provided insights on the outlook for the US that are relevant to Australia.
Hunt said the US is likely to go into recession within the next two years as the Federal Reserve aggressively tightens monetary policy in a bid to curb inflation. However, it will be an unusual recession, given that the US labour market is tight and corporate balance sheets are generally in good shape.
According to Robert Gottliebsen, the situation in Australia is very similar. The key difference is that Australian borrowers are over-extended, meaning they will bear the full brunt of the anti-inflationary measures. Therefore, any recession in Australia will, therefore, likely be worse than in the US.
“We have looked at every single tightening cycle since the Second World War. There are only three times when we’ve had rising inflation the way we have here, and every time it’s ended in a recession”, [Hunt said].
“So if you’re a betting man, you probably do have a recession here in the next 24 months”…
Australian inflation is not far behind the US and our Reserve Bank has a similar interest rate agenda to the US Federal Reserve… The big difference between the US and Australia is that a big proportion of our consumers are over borrowed at flexible interest rates so will bear the full brunt of the anti-inflationary measures. Our recession may be worse than the US.
I have to agree with Gotti here.
Australia’s household debt load is far greater than the US:
Australia’s household sector is the second most indebted in the world.
Most mortgages in the US have a fixed-interest rate, locked in for 30 years. A US 30-year fixed mortgage at 2.5% will still have the same monthly repayment — even after a series of rate rises. This means that a large chunk of existing borrowers in the US are insulated from Fed rate hikes.
The situation is the polar opposite in Australia. Australia is unique in that the overwhelming bulk of mortgage holders are on variable rates, whereas fixed-rate mortgages are only short-term. This means that any change in the official cash rate from the RBA is quickly transmitted into mortgage repayments and the economy.
These factors alone suggest that interest rate hikes will have an outsized impact on Australian households, house prices and consumption, which will drive a deeper recession in Australia if the RBA continues tightening monetary policy aggressively.
All made much worse by Albo’s refusal to end the energy shock.
