Skip to content

CFDs are complex financial instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money. CFDs are complex financial instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.

Warning signs: could Australia fall into recession?

In this week’s edition of Macro Intelligence, we provide a health check of Australia’s economy, analyse the signals markets are sending about future policy and growth, and take a look at three markets to watch.

Video poster image

Article written by Kyle Rodda, Ausbiz

Financial markets are flashing recession signals for the Australian economy. In this week’s edition Macro Intelligence, we provide a health check of Australia’s economy, analyse the signals markets are sending about future policy and growth, and take a look at three markets to watch as the country teeters on the edge of recession.

The fundamentals: low unemployment, high inflation

A snapshot of the current state of the Australian economy paints a mixed picture. Joblessness remains historically low, with the unemployment rate floating around levels not seen for several decades. However, the economy is running above capacity. Inflation is still more than double the top of the RBA’s 2 - 3 percent target range.

Australian CPI and unemployment rate Source: St Louis Fed

While the situation is multi-faceted, tightness in the labour market is considered to be a significant driver of price pressures. Job openings remain very high, even despite the re-opening of national borders following the end of pandemic-related restrictions. According to the latest ABS figures, vacancies remain more than double pre-pandemic levels.

Job vacancies, seasonally adjusted

Although the situation is far less difficult than in other parts of the world, the tightness in the labour market, combined with the overhang of massive fiscal and monetary stimulus, has put upward pressure on wages. The latest Australian Wage Price Index release (WPI) shows wage growth at an 11-year high and trending higher, although “real wages” – wage growth minus the inflation rate – is still profoundly negative.

The latest Australian Wage Price Index release (WPI) Source: Trading Economics

The dynamic has the RBA concerned about what it refers to as “inflation psychology” that risks “unanchoring” inflation expectations. This refers to a self-fulfilling cycle where the expectation of price rises in the future leads workers to demand higher wages, which, in turn, fuels higher prices via increased business costs and stronger consumer demand.

In Australia, inflation expectations are elevated but appear well-anchored and lower than last year's highs.

Inflation expectations Source: Trading Economics

However, financial markets have grown wary of upward pressure on wages from the recent Fair Work Commission decision to lift the minimum wage. It decided to raise the minimum wage by 5.75% in order to support lower wage earners with the significant cost of living increases in the past 12 months. The ruling stoked concern from many economists – and seemingly the RBA – that it could contribute to runaway inflation. This is especially given the rise comes despite falling productivity growth in Australia.

Australia productivity Source: Trading Economics

Could the RBA hike rates into a recession?

Following June’s stronger-than-expected inflation indicator numbers, the Fair Work minimum wage decision, and the so-called “hawkish hike” from the RBA, financial markets have shifted to pricing in more aggressive policy tightening and a potential Australian recession.

Though its communication about policy has recently been muddy, the RBA clearly outlined in its May Statement on Monetary Policy (SOMP) that its forecasts for the Australian economy have been predicated on the assumption of a 6% inflation rate by June and a cash rate that peaks at just over 3.75%.

May Statement on Monetary Policy (SOMP) Source: RBA

The latest CPI indicator for May revealed a headline and trimmed mean inflation rate that will likely remain above the RBA’s forecasts. In addition, the Fair Work decision was higher than the central bank’s forecasts implied, suggesting inflation risks are skewed further to the upside. This set of circumstances led the RBA to hike the cash rate to an 11-year high of 4.1% and deliver its more hawkish forward guidance last week.

As a result, market participants have priced in a more aggressive path for the RBA’s cash rate. Futures pricing indicates another hike by September, with a roughly 50/50 chance of another before the end of the rate hiking cycle, which would see the cash rate peak above 4.5%.

ASX 30 day interbank cash rate futures implied yield curve Source: ASX

Judging by rates markets, the lifting of the cash rate last pushed policy closer to sufficiently restrictive territory. The RBA’s benchmark rate is now above the 2-year Australian government bond yield (along with the yield on most tenors along the curve), indicating that the RBA’s hiking campaign is approaching its end.

2-year Australian government bond yield Source: Trading View

However, the market is signalling that the RBA could potentially hike the Australian economy into a recession. The spread on the 10-year and 2-year Australian government bond yields inverted for the first time since 2008 last week. Although it’s proven a less reliable indicator for predicting a recession than in the US, it still signals very restrictive policy and a very pessimistic growth outlook.

10-year and 2-year Australian government bond yields inverted for the first time since 2008 last week Source: Trading View

Three markets to watch

  • ASX200

The higher weighting of cyclical stocks within the ASX200 has dragged on the index. The market appears in a short-term downward-sloping trend channel. Buyers have appeared below the 7100 level, which marks a confluence of support levels. Resistance appears to be around 7210 and 7300.

ASX200 price chart Source: IG chart
  • AUD/USD

The AUD/USD is trending lower as the US Federal Reserve’s aggressive rate hike cycle and falling commodity prices as global growth slows weigh on the pair. The RBA’s recent hawkish language and the prospect of a pause from the Fed have boosted the Aussie Dollar, with the currency breaking out of descending wedge and testing resistance at 0.6800. A break above that level could open a push to downward-sloping resistance at 0.6990.

AUD/USD price chart Source: IG chart
  • ASX Consumer Discretionary

As rate hikes bite and growth in Australia slows, household discretionary spending will likely slow considerably. The consumer discretionary sector is turning lower, breaking trendline support as momentum skews to the downside. The price of Australia 200 Consumer Discretionary Index has reverted to its 200-day moving average. Support sits at 2860, and resistance sits at 2970.


This information has been prepared by IG, a trading name of IG Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
CFDs are a leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your initial deposit, so please ensure that you fully understand the risks involved.

Start trading forex today

Find opportunity on the world’s most-traded – and most-volatile – financial market

  • Trade spreads from just 0.6 points on EUR/USD
  • Analyse with clear, fast charts
  • Speculate wherever you are with our intuitive mobile apps

See an FX opportunity?

Try a risk-free trade in your demo account, and see whether you’re onto something.

  • Log in to your demo
  • Try a risk-free trade
  • See whether your hunch pays off

See an FX opportunity?

Don’t miss your chance – upgrade to a live account to take advantage.

  • Get spreads from just 0.6 points on popular pairs
  • Analyse and deal seamlessly on fast, intuitive charts
  • See and react to breaking news in-platform

See an FX opportunity?

Don’t miss your chance. Log in to take your position.

Live prices on most popular markets

  • Forex
  • Shares
  • Indices

Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 15 mins.

Plan your trading week

Get the week’s market-moving news sent directly to your inbox every Friday. The Week Ahead gives you a full calendar of upcoming economic events, as well as commentary from our expert analysts on the key markets to watch.

For more info on how we might use your data, see our privacy notice and access policy and privacy webpage.

You might be interested in…

Find out what charges your trades could incur with our transparent fee structure.

Discover why so many clients choose us, and what makes us a world-leading provider of CFDs.

Stay on top of upcoming market-moving events with our customisable economic calendar.