– Thought leadership release –
Navigating Australia’s uncertain economic landscape in 2023
The world is highly interconnected with actions taken by central banks around the world having significant impacts on other countries’ economic fortunes. Currencies are not isolated, and what one country does can impact others. For example, while the United States Dollar (USD) dollar and the Japanese Yen (JPY) are considered safe-haven currencies and typically strengthen in time of turbulence, the Australian Dollar (AUD) and New Zealand Dollar (NZD) are more prone to fluctuations.
The Reserve Bank of Australia (RBA) and other major central banks have aggressively tightened monetary policy over the past year in their battle against rampant inflation. However, the speed and size of these policy moves, coupled with the lag in monetary policy changes, have raised concerns about possible recessions in Australian and the world more broadly over the period ahead.
Peter Dragicevich, Currency Strategist, APAC, Corpay Cross-Border, said, “The prospect of a recession is understandably alarming. Economic output normally rises over time. However, growth rates speed up and slow down at different points, forming a business cycle. It is during the “contraction” period that recessions develop. Typically, this is when demand for goods and services falls, corporate profits weaken, businesses invest less and shed staff, there are more bankruptcies, and growth in wages and inflation slows.”
What could a recession mean for Australia?
The term recession often brings to mind the financial crisis and global recession of 2008, which was the most severe economic event since the Great Depression. However, this wasn’t a typical recession, but rather a banking crisis. The definition of a recession remains a subject of debate. In traditional technical terms, a recession is characterised by two consecutive quarters of negative growth in real gross domestic product (GDP) [1].
But this may also not tell the full story. There could be times when GDP is supported by strong population growth or export volumes, yet private demand is weak, and unemployment is rising. A better way to make an assessment is to look at a range of indicators. For example, in the US, the National Bureau of Economic Research (NBER) determines if there is a recession based on an array of activity and labour market data [2].
While the definition of a recession may be subject to debate, it’s potential impact on the Australian economy cannot be overlooked. The consequences of a recession can be far-reaching and severe, with businesses shutting down, unemployment rising, and the economy as a whole experiencing a downturn.
Australia’s current economic situation
Peter Dragicevich said, “Prior to COVID, Australia hadn’t experienced consecutive quarters of falling GDP for almost 30 years due to strong population growth and the mining boom [3]; however, risks of a recession over the next 12 months have risen. The Reserve Bank of Australia (RBA) has lifted interest rates by a cumulative 375bps [4]. This is the fastest rate-hiking cycle since the early 1980s. The tightening in credit conditions has likely already impacted the housing market, with prices, new lending, and turnover falling. Consumer confidence is below average and retail spending is showing signs of slowing down [5].”
Over time, in theory, the impact of these interest rate hikes should broaden, especially as the large pool of cheap fixed-rate mortgages entered during COVID-19 are refinanced at substantially higher rates over coming months, and the cash flow hit on indebted households intensifies. The sharp slowdown in private sector activity is also expected to spill over into the labour market, with Australia’s unemployment rate set to increase.
Despite the slowdown in Australia’s economic growth, there are some offsets that may hold up aggregate GDP and mask the private sector slowdown. So, while it may feel recessionary for many households and businesses Australia may avoid a ‘technical’ one. For example, China’s long-awaited shift from “COVID zero” may help cushion the blow from higher rates, while the reopening of international borders and re-accelerating population growth also looks set to be supportive of aggregate GDP which is a volume measure.
Managing risk in times of economic downturn
Peter Dragicevich said, “Navigating a recession, or any kind of prolonged downturn in economic activity, can be difficult for businesses and individuals alike. At the end of the day, it’s important to focus on financial resilience and adaptability. This can include reducing costs, looking for new opportunities, diversifying income streams, reviewing financial strategies, and considering currency hedging to manage the risks associated with market fluctuations.”
Currency hedging can be particularly important for businesses with international operations or transactions, as fluctuations in currency exchange rates can have a significant impact on their financial performance. By implementing a currency hedging strategy, businesses can mitigate some of these risks and improve their financial resilience during economic downturns. As the global economy navigates through the impacts of higher interest rates and the possibility of a recession, safe-haven currencies are likely to perform better than currencies leveraged to the global economic cycle due to lower growth expectations and increased volatility.
Peter Dragicevich said, “However, as the worst (we believe) of the economic downturn passes, and lower inflation allows policymakers scope to provide support, growth-linked currencies like AUD should recover lost ground. For businesses operating in multiple markets, managing foreign exchange needs can become more complex; however, financial services firms can offer specialised solutions to help manage currency risk and streamline cross-border payments. This lets businesses focus on building financial resilience and adaptability to withstand economic challenges.”
