Treasurer Jim Chalmers is confident Australia is not heading towards a recession despite some economists warning the path to a soft landing from soaring inflation is narrowing.

He says the Australian economy might stutter as interest rates lift, but neither the Reserve Bank nor Treasury are anticipating a recession.

“We do expect the Australian economy to slow considerably,” the treasurer said.

“This is the inevitable consequence of the interest rate rises that began before the election and continued after, and also the substantial slowdown in the global economy.”

Mr Chalmers said the Australian labour market was outperforming international peers, leaving the nation in a strong position to withstand economic challenges.

Reserve Bank governor Philip Lowe also maintains Australia is on its “narrow path” to return inflation to a two-to-three per cent target range with a growing economy.

But in his most recent public appearance, Dr Lowe conceded there were significant risks to this pathway.

Some economists are also growing more worried about a recession in Australia, including HSBC’s Paul Bloxham.

“A recession is not our central case, but despite the helpful support of strong population underpinning GDP, we see a 50-50 chance that Australia tips into a recession,” he wrote in a note.

Mr Bloxham said the risk was high inflation started to embed itself in the system as the sharply rising cost of living prompted workers to ask for pay rises.

“And that if wages growth picked up too much, it would become more difficult to get inflation back to the central bank’s target,” he said.

Under this scenario, there would need to be a much steeper fall in demand and a marked rise in unemployment to cool off wages growth.

But separate analysis by St George economists suggests goods inflation will ease quickly as wholesalers start discounting to get rid of excess stock, which could help take pressure off the RBA’s interest rate tightening cycle.

Businesses have scrambled to restock their warehouses after the COVID-19 pandemic disrupted supply chains.

Wholesale business inventories have shot to record highs, well above pre-pandemic levels.

Retailers have also rebuilt their supplies to pre-pandemic levels.

Under these conditions, St George economist Jameson Coombs said it was likely wholesalers would start lowering their prices as economic activity slowed.

“The sheer volume of inventories coupled with softer consumer demand means that more discounting than usual is likely to be necessary,” he said.

Mr Coombs said high industrial property rents were making it expensive to store goods, adding another incentive to unload stock.

The economist said the discounting would accelerate the disinflationary process already under way in goods prices.

Goods prices, as measured in the consumer price index, were rising at a rate of 7.6 per cent in the March quarter, down from 9.5 per cent in the December quarter.

Mr Coombs said the findings highlighted the importance of services in the fight against high inflation.

 

Andrew Brown and Poppy Johnston
(Australian Associated Press)