A global recession looks increasingly likely – but here's how Australia could escape it

Global stock markets are tanking on fears of recessions in the US, the UK and Europe, and the OECD is actually forecasting recessions in Europe.

So is recession now inevitable in Australia? Not at all.

The good news is there are several reasons to think Australia might be able to escape a global slide into recession – though it will need careful management.

What could push Australia into recession?

Here’s the worst case scenario. The United States keeps pushing up interest rates until it brings on a recession, and Australia gets pressured to do the same.

Here’s how it’s playing out at the moment. The US Federal Reserve has lifted rates at each of its past five meetings. The past three hikes have been massive by Australian and US standards – 0.75 percentage points each, enough to slow already-forecast US economic growth to a trickle, which is what the Fed wants to fight inflation.

But the Fed is planning to go further. Its chair, Jerome Powell says he expects ongoing increases, and last week countenanced the possibility they would throw the country into recession:

We don’t know, no one knows, whether this process will lead to a recession or if so, how significant that recession would be. That’s going to depend on how quickly wage and price inflation pressures come down, whether expectations remain anchored, and whether also we get more labour supply.

Powell is saying he is prepared to risk a recession to get inflation down.

The UK’s top banker already expects a recession

Powell’s not alone. His UK equivalent, Bank of England governor Andrew Bailey, has lifted rates seven times since December. Bailey says he is prepared to do more to fight inflation – “forcefully, as necessary” – and is actually forecasting a recession, which he says has probably started.

So alarmed is the new UK government headed by Liz Truss that on Friday it unveiled a £45 billion (A$75 billion) “growth plan” made up of tax cuts and infrastructure spending, on top of spending of £60 billion (A$100 billion) to cap household and business energy bills.

Given what’s now happening overseas, you might expect Australia’s Reserve Bank to take note and behave differently to central banks overseas.

Except it’s not quite that easy.

Pressure to follow the US

Whenever the US hikes interest rates (it’s hiked them seven times since March), investors buy US dollars to take advantage of the higher rates. This forces up the price of the US dollar in relation to currencies of countries that didn’t hike.

This means unless countries such as Australia hike in line with the US, the values of their currencies are likely to fall in relation to the US dollar – meaning their values are likely to fall in relation to the currency in which most trade takes place.

This means more expensive imports, which means more inflation.

And Australia’s Reserve Bank is trying to contain inflation.

The upshot is whenever the US pushes up rates (no matter how recklessly) there’s pressure on Australia to do the same, simply to stop inflation getting worse.

The risk of ‘a gratuitously severe recession’

Since March, when the US began pushing up interest rates more aggressively than Australia, the value of the Australian dollar has slid from US0.73 to less than $US0.65, putting upward pressure on goods traded in US dollars of about 11%.