Australian Economy

Recession? Interest rates? What the movers and shakers think is going to happen to the economy

Will Australia have a recession?

What’ll happen to interest rates?

I have answers, and a new favourite economic theory: “F*** it” money.

Recently, banks have started re-engaging with journalists, in ways that they haven’t over the past three years.

Having meals together was largely suspended during the first years of the COVID pandemic. Now it’s on: with a lot to catch up on.

An opulent dining room with chandeliers and large windows revealing a stunning view over Hong Kong.
Inside Restaurant Petrus in Hong Kong, where Alex Gillett and other naval offices enjoyed a lavish dinner.(Wikimedia Commons)

In the past few months, I’ve spent time with the leaders of large banks, influential fund managers and noted economists. Those conversations were not recorded or to be attributed to individuals.

But I’ve condensed the key things I’ve learned, below.

Rumours fly

Markets run on two things: greed and fear.

A lot of the fear has been centred around global banking giant Credit Suisse. The share price of the Swiss company has been cut in half this year after internal turmoil and a series of scandals.

That’s a generous assessment. The bank had big losses, hired private detectives to spy on employees, laundered money for a criminal organisation in Bulgaria, faced lawsuits and paid more than half a billion dollar fine for facilitating corrupt loans in Mozambique.

The new chair Axel Lehmann says he’ll reform the company after a “horrible” year, but his name underlines the problem.

The Credit Suisse logo, which are the words in white on a glossy black building wall.
Swiss bank Credit Suisse is a global brand – and one that has suffered a string of hits to its reputation in recent years. (Walter Bieri/Keystone via AP)

The shock bankruptcy of unrelated US firm Lehman Brothers helped blow up the US economy in 2008, leading to the global financial crisis, or GFC.

It was a hammer blow with immense consequences: our stock exchange’s key index took 12 years to recover to where it was before the GFC.

But Lehman Brothers had paid too much for assets and used accounting tricks to make its books look safer than they were. When the crisis caused the curtain to be pulled back, other banks were exposed too.

No-one I spoke to professed to have insider knowledge of Credit Suisse.

But they were emphatic that the conditions of 2008 – where other globe-spanning institutions had similar problems about over-valued assets – simply weren’t there.

They don’t see GFC Mark II. But they do see problems.

Big, big ones.

Global problems

Issues in the global economy are as large as the world is wide.

In the United Kingdom the Bank of England is predicting a recession that will run from the end of this year and through all of 2023. That would be the longest recession since the GFC.

In the United States they’re more optimistic, but it might just be the weather.

Their central bank, the Federal Reserve or “Fed”, is trying to slow inflation.

Jerome Powell stands at a podium behind a wall of American flags.
Federal Reserve chair Jerome Powell has changed the course of the US central bank after the emergency measures of the pandemic. (AP: Jacquelyn Martin)

But the way it’s doing it – raising interest rates – has a lot of other impacts. A report by Bloomberg Economics says a recession will hit in the coming 12 months. Normally they give a percentage of the likelihood.

That figure is now 100 per cent.

Bank figures concur with that view for both nations, although they don’t agree on the depth or the length.

And some of my conversations predate the September 23 announcement by (now former) UK prime minister Liz Truss of an unfunded tax-cutting plan so wild it caused a plunge in the value of the pound and cost her a job she’d only held for a couple of months.

Recession in Australia?

What the people I’ve been speaking to do agree on is that our problems aren’t as bad.

Inflation is an issue, but unemployment is wildly low, meaning more people than every have a wage that can help them ride it out.

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