Australia goes into recession

Whether the economy has a hard or soft landing is open to debate, but at the very least we are in for some volatile times in the battle against inflation

- Annette Sampson

While there has been talk of recession since interest rates started to rise, the risks have become higher with the Reserve Bank (and central banks overseas) still showing no signs that they are finished with rate hikes.

In late May, Mark Delaney, the chief investment officer of AustralianSuper, Australia’s largest super fund, said he believed the Reserve Bank would tip the economy into recession in its battle to force inflation down.

Delaney told a Morningstar investment conference the super fund was positioning its $280 billion portfolio for a downturn, and was short on stocks and long in bonds.

“Who wants to be the central banker who brought back inflation?” he asked. “People will forgive them for having a recession, but they won’t forgive them for ongoing inflation.”

Delaney said this increased the probability of a recession because central banks would lean into inflation pretty hard. “And they’ll be successful at it.”

Robert Mead, the co-head of Asia Pacific portfolio management at investment firm Pimco, also told the conference it was unlikely the Reserve Bank will be able to navigate a soft landing for the Australian economy.

“As rates have gone higher and higher, as consumers have been reluctant to stop spending, we think that miracle of a soft landing that the RBA has been hoping for will be a very difficult path to move down,” he said. “That means that recession becomes our base case, not only for the US but for Australia as well.”

Greg Davis, the chief investment officer of the world’s second-largest asset manager, Vanguard, told the conference it put the probability of a recession in Australia at about 50% and in the US at 90%.