Feeling gloomy about the economy? The ‘vibecession’ has arrived in Australia – but experts are less worried | Australian economy

Australian families were already on edge before the bombs started falling on Iran.

The high cost of living and the re-acceleration of inflation forced the Central Bank to increase interest rates.

It is clear that this is a period of deep uncertainty and anxiety.

However, it is notable that more than six in 10 Australians think the country is either already in recession or will be within the next 12 months. According to a survey conducted for Nine newspaper.

Just 15 percent thought the country would avoid a deep crisis, while 22 percent said they were unsure.

These results, along with the collapse in consumer confidence, reflect a deep and persistent pessimism in society about the state of the economy.

However, experts do not share this degree of pessimism.

Economists believe the probability of a recession in the next 12 months is 20% on average, according to a Bloomberg survey.

This is not zero, but the rate in the run-up to the Iran war was only 15%.

National Australia Bank’s head of Australian economics, Gareth Spence, said the Iran war had doubled the chances of a recession to 20%.

That’s a significant increase, but Spence says: “I think we could have a bit of a downturn on that, but not a recession.”

Currently the NAB forecast is for growth to slow to 1.5% from the pre-war forecast of 2.2%. Spence says it’s a “material downgrade.”

It predicts unemployment will rise from 4.3 percent to 4.8 percent. Again, a meaningful increase, but not that different from what they thought would happen earlier in the year.

Belinda Allen, Commonwealth Bank’s head of Australian economics, tracks weekly card spending data for the bank’s millions of customers.

The figures so far show that spending remains stable and even shows some growth, even after accounting for the unwelcome rise in fuel costs.

Allen says there are “pockets” of weakness, particularly in travel and accommodation, as more holidaymakers stay at home over the Easter holidays, with the impact more pronounced in regional areas rather than cities.

Allen says the possibility of a recession is “negligible,” at least for now.

“Overall, the economy as a whole is holding up.”

We may have just seen the edge of the oil shock, and experts’ Panglossian views are about to be shattered.

As Spence says, “the worst case is that you have a significant amount of rationing because that’s the part we can’t predict.”

“Of course prices would be higher, but it is difficult to predict the physical disruption in sectors such as agriculture and transport and how this will then flow, and could increase exponentially.”

It’s hard to predict, but that hasn’t stopped economists at EY from trying it out.

They modeled a worst-case scenario in which a prolonged closure of the Strait of Hormuz would lead to physical fuel and fertilizer shortages.

This scenario would deal a $42 billion hit to the economy, concentrated in the transportation and construction sectors, resulting in a massive 1.5 percentage point drop from GDP, leaving 160,000 people unemployed.

Cherelle Murphy, chief economist at EY, says that even in this worst-case scenario, the economy as a whole limps along, posting growth of half a percentage point in any quarter without outright contraction.

“We haven’t quite reached the recession,” says Murphy.

At this point, it’s worth noting that recession is just a word, and the outlook looks bad enough without slapping a dramatic label on it.

The term “jitter” was coined in the United States in 2022 to refer to the persistent gap between how Americans say they experience the economy and what the data says.

“There has been a shift,” says Allen.

“We are asked a lot of questions about intergenerational equity and wealth transfers. These big issues are compounded and contribute to this more fragmented global environment.”

Consumer confidence has never fully recovered following the Covid pandemic, both here and around the world.

It is useful to keep this fact in mind. Not as a way to reduce or eliminate the real stress Australians are feeling, but to highlight that there is a level of disaster that could be counterproductive to the economy.

As American baseball player Yogi Berra once said: It’s hard to make predictions, especially about the future.

Economists are predicting Australia will struggle for now, and Murphy says he and his team will of course rethink their scenarios as the year progresses.

“But let’s manage this right now. Let’s not think that this is the end of growth as we know it in 2026.”