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Australia’s recession warning signs are flashing as RBA sends rates higher
Rising unemployment has moved Australia closer to a recession warning as the Reserve Bank of Australia (RBA) delivers its fifth interest rate hike of the year.
- Janus Henderson strategist Emma Lawson warned in her latest that unemployment looks set to keep climbing after a 0.45 percentage point rise from its 12-month low.
- An expert expects Australia to avoid a recession, with growth easing to around 1.6 per cent in 2027 and unemployment peaking at around 4.9 per cent.
- The Reserve Bank of Australia lifted the cash rate 25 basis points to 4.85 per cent in a six-to-three vote, its fifth hike this year.
Rising unemployment has moved Australia closer to a recession warning as the Reserve Bank of Australia (RBA) delivers its fifth interest rate hike of the year, though experts expect rate cuts late next year.
Australia’s unemployment rate looks set to keep climbing after rising 0.45 percentage points from its 12-month low, Emma Lawson, fixed interest strategist at global asset manager Janus Henderson, warned in her latest economic report.
The climb is still short of the 0.75 points needed to trigger the Australian version of the Sahm rule, a recession signal that tracks how far the three-month average unemployment rate rises from its lowest point in the past 12 months.
“As the economy slows, the unemployment rate rises at an ever-faster rate,” Lawson wrote, saying the speed of the rise matters as well as the level.
The average owner-occupier with $600,000 left on their mortgage must now find an extra $100 a month, or $500 a month since February.
“We currently forecast growth to slow rather than fall backwards,” Anthony Malouf, an economist at global payments firm Ebury, told The Money Edition.
He forecasts annual average growth easing from around 2 per cent this year to around 1.6 per cent in 2027, with quarterly growth staying positive over the coming year.
“The Sahm rule was built around the US, where unemployment tends to snowball once layoffs begin, whereas our labour market adjusts more gradually and some cooling is exactly what we would expect after this year’s rate hikes,” Malouf said.
Australia has seen readings above 0.75 percentage points without a recession, in 2001 and 2009, Malouf said, so Ebury treats the rule as “a gauge of how quickly the labour market is cooling and not as a recession call.”
RBA lifts rate
The RBA, whose mandate covers full employment as well as inflation, lifted the cash rate 25 basis points to 4.85 per cent on Tuesday, the highest level since November 2008.
The board voted six to three for the hike with inflation at 4.3 per cent, warning of “an increasing risk that higher inflation expectations will become embedded,” and projected a bigger rise in unemployment than it forecast in August.
The RBA also expects inflation to stay above 3 per cent for the coming year and not reach the top of its 2 to 3 per cent target until late 2027, about three quarters later than it previously forecast.
The board also projected a bigger rise in unemployment than it forecast in August, though Lawson said the labour market still has areas of strength, with plenty of vacancies and firms reporting labour constraints.
But Westpac’s survey shows households increasingly expect unemployment to rise, job ads are softening, and business employment expectations have dropped to zero.
“Businesses are telling us they are no longer looking to hire,” she wrote, with unemployment at 4.7 per cent.
Malouf said “softer growth in labour supply should keep the unemployment rate relatively low even as demand for workers eases,” with a peak of around 4.9 per cent next year.
The RBA also expects employment to keep growing as unemployment rises.
The economist forecasts annual average growth easing from around 2 per cent this year to around 1.6 per cent in 2027.
Business investment has been “the standout,” supported by the artificial intelligence rollout despite some signs of slowing in the second quarter, while households have “held up better than expected” this year, Malouf said.
Lawson’s report said the risk of rising unemployment is one reason it expects the RBA to lower rates in the later stages of 2027, noting how “Australia will still experience policy cycles, despite what markets are currently pricing.”
Malouf also tips cuts towards the end of next year, as inflation returns to target and growth troughs.
“2027 will probably be a slower year for growth and the labour market, but the turn in rates should set up a recovery towards the end of next year,” he said.
Topics: Australia, Interest Rates, RBA, Recession