Recession fears rise amid interest rate hikes, high petrol prices and global uncertainty

Australia’s record-breaking 29-year recession-free run came to a halt during the depths of the pandemic.

But this was so short-lived and offset by an avalanche of money to soften the blow; Even today, many Australians forget that the country suffered its worst economic downturn since the Great Depression in early 2020.

This may explain what happened on Tuesday when Federal Reserve governor Michele Bullock was asked whether her decision to raise oil prices as well as official interest rates for a second consecutive month would push the country into recession.

“We don’t want to have a recession, but if it’s difficult to bring down inflation, then you know we’re going to have to deal with that possibility,” he said at the post-meeting press conference.

As measured by Google Trends, searches for “recession” increased immediately following Bullock’s comments.

The last spike in the hunt for a recession came in April of last year, when Donald Trump launched his “liberation day” tariff war against the world (and the penguins on Heard and McDonald islands). Bullock’s comment received nearly twice as much attention as Trump’s.

The rate was higher than during fears of an economic downturn following the end of the low and middle income tax cut, which will hit 9 million Australian workers in mid-2023.

Last week, fears of recession among Australians were at their highest level this century, apart from Covid-19 and the global financial crisis.

Bullock’s comments were made just hours after the release of ANZ-Roy Morgan’s weekly measure of consumer confidence. It showed the country’s shoppers were at their most pessimistic since March 2020, when Australia’s economy was shut down and our TV screens were filled with images of a makeshift morgue in New York’s Central Park.

The fact that consumers were this badly off even before they were attacked by the Federal Reserve reflects their legitimate fears that the ongoing war in the Middle East will mean higher prices for almost everything they buy.

Higher interest rates, the pre-war inflation surge that largely led the RBA to tighten monetary policy this week, and the rise in the cost of putting petrol in the family car (if you have any at your petrol station) couldn’t come at a tougher time for Chancellor Jim Chalmers and Chancellor of the Exchequer Katy Gallagher.

There are seven weeks left until the government’s fifth budget is announced.

Normally, most of the most important elements of the budget are locked in at this point. But as Chalmers noted this week, the level of uncertainty around the global economy (and its impact on the Australian economy) is so high that major decisions will be made later than usual.

Chalmers and Gallagher were already under pressure to deliver a reform budget, given the political windfall for the government from Anthony Albanese’s impressive election victory in 2025.

It’s been more than a decade since a treasurer tried to use his budget to advance major fiscal and economic reforms. This was Joe Hockey and Mathias Cormann’s 2014 budget, now remembered as one of the worst political documents ever put together by a government.

Chalmers touched on the reform nature of the upcoming fiscal plan in a speech to a room full of the country’s brightest economists in Melbourne on Thursday.

One of the problems with the 2014 budget was that Hockey, Cormann and then-prime minister Tony Abbott failed to announce that change was coming. Even within Abbott’s own government, some ideas have raised eyebrows, ranging from paying Medicare co-payments to raising the age pension access age to 70.

According to Chalmers, the current administration is too open to the public on issues related to the economy, tax system and budget.

Last August’s economic roundtable concluded with a three-day discussion on the problems on the government’s agenda and some of the solutions. In December, the Productivity Commission presented Chalmers with five separate papers containing proposals on everything from business tax reform to health financing.

And in early February, Chalmers began speaking more openly about the government’s intention to deal with “intergenerational issues” such as the property market, which appears to be to the detriment of almost every young Australian.

This week, he confirmed that all this debate, which spilled over into a one-day meeting with independent economists at the federal Treasury earlier this month, would be broken down into three reform packages covering spending cuts, productivity and tax in the May 12 budget.

“[The budget] “There are still these three big pressing problems that we, as a responsible group of people, cannot ignore,” he said in response to a question from the assembled guests.

“I feel like even though society is under maximum pressure (cost of living pressure and other pressures), there is some level or layer of understanding in society that sometimes tough decisions are necessary.”

Prime ministers’ ears perk up when finance ministers and finance ministers talk about “difficult decisions”. As 2014 (and, going back even further, John Dawkins’s 1993 budget) showed, tough decisions can mean electoral disaster.

Factor in the heated political landscape in which One Nation, a party that can detect problems like a bloodhound scenting a wounded rabbit, has the upper hand against a Coalition that is unsure of its own core beliefs, and the “tough budget” could be politically problematic for the Albanians.

Chalmers, who publicly announced the Morrison government’s changes to stage 3 tax cuts in late 2022 and finally got the Albanians on board more than a year later, understands the potential blowback from the next budget.

“We know that the idea that you can make every person happy with any decision is an unrealistic and naive goal,” he said.

“It’s not unrealistic or naive that I feel the Australian people are ready for the kinds of issues we’re raising with them.”

Chalmers and Gallagher will present the budget on May 12. A week ago, nine members of the Central Bank’s monetary policy committee will meet again and there will be a high probability that a third interest rate hike will be on the agenda.

By then there should be some more clarity on the war against Iran. But this is not certain. This week’s attack on the South Pars gas field shared by Qatar and Iran sent oil prices soaring to US$120 ($169) per barrel and was a sign that no one can be sure how the next few days, let alone the next month, will play out.

This lack of confidence was also clearly seen in the RBA’s decision to increase interest rates, which was taken by a 5-4 vote on Tuesday. Bullock went out of his way to argue that all members of the board believed higher interest rates were needed; The split was about timing.

As Bullock noted, the bank worries that high oil prices, on top of an economy with existing inflation problems, could spell disaster.

“If we don’t raise interest rates and We will see second round effects from oil prices and fuel prices, which will be reflected in supply chains. Obviously, this adds to operating costs etc. “He will enter,” he said.

“If we don’t reduce excess demand, businesses will include it in their costs. So the situation will be worse for everyone.”

But if global oil prices rise further or remain around $100 a barrel through May, concerns voiced by the RBA’s four members about the timing of further rate cuts could quickly translate into what steps the bank should take to avoid a recession.

The Reserve has not yet modeled the economic effects of high-priced oil. But Chalmers revealed that the federal Treasury did, and the story was unpleasant at best.

If oil costs $100 a barrel for a few months and returns to pre-war levels of around $60 by the end of the year, inflation would be close to 5 percent while economic growth would be cut by 0.2 percent.

However, if oil remains around $120 a barrel, inflation will approach 6 percent and economic growth will decrease by 0.6 percent. The economy will not recover until at least 2027, with serious consequences for unemployment.

Economist Chris Richardson describes the $100 per barrel scenario as a “Oh My God” scenario. A $120 barrel is “Oh no.”

The Treasury is in the process of modeling an even higher oil price. This is the “Oh My God” scenario.

This clearly indicates a domestic economy in recession with high inflation, the worst worldwide.

Bullock tried to soften the impact of the bank’s decision.

“I understand this is going to be difficult for some people, and this hit to fuel prices and this additional increase in mortgage rates is going to be difficult for some people,” he acknowledged.

Strong job growth and solid wage gains have softened the blow for many people over the past two years. But even before this week’s rate hike there were signs of pressure.

The National Debt Helpline, for example, received almost 16,000 calls in February. This was the largest February figure since 2020 and a 9 per cent increase on the same period last year.

Financial advisors on the hotline are finding a new demographic calling for help: people who are fully employed but struggling to cover their mortgages and the cost of essential items.

A quarter of people are looking for help to cope with housing stress, which includes their monthly mortgage, weekly rent, council rates and strata charges.

By March the helpline began receiving calls about fuel costs, particularly from people in regional areas.

There have been a number of economic shocks over the last two decades. Starting with the global financial crisis in 2008, they included the pandemic, the post-pandemic inflation surge (caused in part by supply chain shocks), and the subsequent trade disruption and tariff war initiated by Donald Trump.

Trump has now made his fifth war with a real war against Iran.

But more may be on the way. On Thursday, the Federal Reserve published its six-month health check of the financial system.

The report is normally a dry, sober assessment, full of central bank jargon, of whether any risks to the flow of credit in the economy have emerged.

But this report was different. The jargon was still present, but the authors expressed concern that the escalation of debt in the stock and property markets (here and around the world), as well as the disaster unfolding in the Middle East, was a clear and present danger.

The amount of debt that investors ignored potential risks meant there was now an increased risk of “the potential for disorderly repricing of assets in response to further adverse developments”.

In other words, a collapse in real estate, stock and commodity prices that will shake the financial sector deeply.

“The risk of significant operational, cyber and security incidents, which has increased in recent years, is also currently increasing,” the statement continued.

“The Australian financial system has built a good degree of resilience to navigate a high-risk international environment, but any of these events, if severe enough, could create financial stability issues in Australia.”

Australians may soon be looking for more than just a definition of economic recession.

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