Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 488

How likely is a US recession? About 75%

The following is an edited transcript of an interview that UNSW did with Konark Saxena, Associate Professor in the School of Banking and Finance at UNSW Business School.

How likely is a recession in the US? Percentage chances?

A/Prof Saxena: The chance of a US recession is about 75%, by my estimates.

Why such high odds? In order to bring down inflation, the US Federal Reserve needs to increase interest rates till either inflation subsides, or economic growth starts flattening. Given the Federal Reserve’s mandate and the current momentum of inflation, I feel that economic activity will slow down before the Federal Reserve stops increasing interest rates. Technically, that means that a recession is very likely.

Having said that, I want to point out that there are various types of recessions. My expectation is that the US recession will be a mild one.

In this case, global GDP growth would slow down, but not by as much as the early 1980s, after the Federal Reserve’s Volker increased interest rates to combat inflation. And because activity wouldn’t slow down by that much, inflation wouldn’t slow down by that much either.

This mild recession scenario assumes that the FED would stop tightening before the recession became severe, even if inflation remains persistently high at that time.

What likely impact will this have on Australia, as well as the rest of the world (particularly trading partners)?

A/Prof Saxena: Let’s consider the mild recession scenario. In this case, both inflation and interest rates in the US economy are expected to remain high, while growth flattens. I don’t expect the US unemployment rate to increase dramatically, which is one of the reasons I’m calling it a mild US recession.

For the rest of the world, this has two main impacts. First, lower US growth is going to slow down the growth in the rest of the world. Especially for countries that export to the US, and those that export to other countries like China, which in turn export to the US. This typically also leads to lower commodity demand and prices.

Second, high US interest rates can create financial distress in countries that are unable to match them. High US interest rates will put pressure on countries to either increase domestic interest rates or accept a substantially devalued currency because capital chases currencies with relatively higher interest rates.

This outflow of capital from lower interest rate countries might push some highly leveraged economies into financial distress, especially those with USD denominated debt.

What factors would likely help protect Australia from a global recession?

A/Prof Saxena: The Australian economy has been resilient in a global decreasing interest rate environment. That spans the last three decades. If the US recession leads us back towards a globally low interest rate environment, then I expect Australia to continue to be resilient – even in times when global growth has slowed down.

While the current low level of wage inflation in a high consumption inflation environment is a significant issue, in the short-run, it is also a strength that will protect the Australian economy and helps keep inflation under control.

Further, this low level of wage inflation means that there is more room for fiscal policy to help wages grow to match rising interest rates. Increasing wages can help offset any required increases in interest rates, so that households with higher nominal wages will find it easier to pay off higher nominal interest rates. For example, if a household needs to pay $100 extra in interest every week, but also earns $100 more in wages, then the effect of nominal interest rate hikes is offset by nominal wage increases.

Another advantage of the current low wage inflation, and a good level of fiscal policy flexibility compared to most other advanced economies, is that it gives the RBA more flexibility to keep rates lower for longer than some international peers. This buys us time to fix some of the issues that risk household financial distress.

Where is the Australian economy more exposed?

A/Prof Saxena: In my view, the main risk to the Australian economy is financial distress. I expect the real economy to be resilient if we are able to avoid financial distress.

There are two types of financial distress risks I am concerned about: household financial distress and currency risk.

Household financial distress increases if households can’t pay their mortgages when the RBA increases interest rates too much. Currency crisis risk increases if capital leaves Australia for higher interest rate currencies when the RBA does not increase interest rates enough.

It is a delicate situation and there is a risk that eventually RBA will not have enough flexibility to manage these two conflicting forces.

As mentioned above, I feel one way to avoid these two extreme scenarios, is increasing labour productivity, wage growth, and wage inflation. If households are working and their wages are growing enough, they should be able to handle increases in interest rates thanks to their higher pay cheques. Such wage inflation can help not only working homeowners pay higher nominal interest rates, but it also benefits renters who can save more.

If we can manage an orderly reduction of (nominal) household debt without incentivising too much risk-taking, then it will give the RBA more flexibility to increase interest rates and bring them in line with US interest rates.

What would the likely impact of a recession be on the average Australian?

A/Prof Saxena: Assuming we are forced to keep interest rates low, I see the impact of the recession on Australian consumers on two main fronts – the first of which is imported US inflation.

High US inflation will also increase the price of US goods and services that we purchase from the US, and thereby increase the general price levels around the world. So, the rest of the world will import US inflation unless they can offer higher real rates and strengthen their USD exchange rates to offset US inflation.

The second front Australians may be impacted with is reduced Australian wealth in US dollars, which would lower the ability to import and consume foreign goods and services. This is likely to hurt Australian consumers as our imports from the US are an important part of our consumption basket.

While the first is largely an external factor that Australian policy cannot influence, the second is not. The reduction in (US dollar-denominated) Australian wealth, can be avoided if we are able to sustain higher interest rates without causing domestic financial distress.

 

Konark Saxena is an Associate Professor at the School of Banking and Finance at UNSW Business School. This article was originally published in BusinessThink, the digital platform of UNSW Business School, an alliance partner of Firstlinks.

 

  •   14 December 2022
  • 1
  •      
  •   

RELATED ARTICLES

Time to announce the X-factor for 2024

Global recession looms as debt balloons

Seven lessons on how investors should prepare for a recession

banner

Most viewed in recent weeks

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

Four best-ever charts for every adviser and investor

In any year since 1875, if you'd invested in the ASX, turned away and come back eight years later, your average return would be 120% with no negative periods. It's just one of the must-have stats that all investors should know.

Why super returns may be heading lower

Five mega trends point to risks of a more inflation prone and lower growth environment. This, along with rich market valuations, should constrain medium term superannuation returns to around 5% per annum.

The hidden property empire of Australia’s politicians

With rising home prices and falling affordability, political leaders preach reform. But asset disclosures show many are heavily invested in property - raising doubts about whose interests housing policy really protects.

Preparing for aged care

Whether for yourself or a family member, it’s never too early to start thinking about aged care. This looks at the best ways to plan ahead, as well as the changes coming to aged care from November 1 this year.

Our experts on Jim Chalmers' super tax backdown

Labor has caved to pressure on key parts of the Division 296 tax, though also added some important nuances. Here are six experts’ views on the changes and what they mean for you.        

Latest Updates

A speech from the Prime Minister on fixing housing

“Fellow Australians, I want to address our most pressing national issue: housing. For too long, governments have tiptoed around problems from escalating prices, but for the sake of our younger generations, that stops today.”        

Taxation

Family trusts: Are they still worth it?

Family trusts remain a core structure for wealth management, but rising ATO scrutiny and complex compliance raise questions about their ongoing value. Are the benefits still worth the administrative burden?

Exchange traded products

Multiple ways to win

Both active and passive investing can work, but active investment doesn’t in the way it is practised by many fund managers and passive investing doesn’t work in the way most end investors practise it. Here’s a better way.

Economy

The Future Fund may become a 'bad bank' for problem home loans

The Future Fund says it will not be paying defined benefit pensions until at least 2033 - raising as many questions as answers. This points to an increasingly uncertain future for Australia's sovereign wealth fund.

Investment strategies

Managed accounts and the future of portfolio construction

With $233 billion under management, managed accounts are evolving into diversified, transparent, and liquid investment frameworks. The rise of ETFs and private markets marks a shift in portfolio design and discipline. 

Property

Commercial property prospects are looking up

Commercial property is seeing the same supply issues as the residential market. Given the chronic undersupply and a recent pickup in demand, it bodes well for an upturn in commercial real estate prices.

Infrastructure

Private toll roads need a shake-up

Privatised toll roads in Australia help governments avoid upfront costs but often push financial risks onto taxpayers while creating monopolies and unfair toll burdens for commuters and businesses.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.