Macro Intelligence: is a recession around the corner?

In this week’s edition of Macro Intelligence, we explore the outlook for the global economy and the possibility of a recession.

Is a recession looming?

The world remains in a period of economic uncertainty, with soaring interest rates, higher oil prices, and dwindling pandemic savings all contributing factors. Economists have been closely monitoring the elevated likelihood of a recession in the US and Eurozone for nearly a year, but their conviction levels have varied.

One warning sign of a recession, the inversion of the US 2-10 year yield curve, has been flashing since June 2022. The US 10-year minus 2-year Treasury yield spread has remained inverted since then, which is typically indicative of a recession within 12 months.

US 10-year minus 2-year Treasury yield chart

US Treasuries yield curve chart

A US shutdown is averted... again

The US Congress passed a bi-partisan bill at the 11th hour to avoid a government shutdown, but there are still speed bumps ahead.

The bill, signed by President Biden, will only liquidate the government for a further 45 days, meaning that if an agreement on the spending plans is not achieved by November 17, the likelihood of a shutdown has just been pushed out further into the future.

The 11th-hour US government funding bill will mean that key data releases including Friday's monthly payrolls report can go ahead on time. Delayed data could have intensified market uncertainties by keeping the Fed on the sidelines.

Economic warning signs

Bloomberg Economics sees six potential reasons a US recession is likely; citing worker strikes, rising oil prices and higher inflation among them. The team also cites history as an indicator - with the number of news articles mentioning the optimism of a 'soft landing' often peaking before a downturn hits.

Billionaire hedge fund manager Bill Ackman is also seeing cracks appear. He sees the 30-year rate testing the mid-5% and the benchmark 10-year approaching 5%. Ackman said he’s still shorting 30-year Treasury bills as a hedge.

Rate of news articles mentioning a 'soft landing' ahead of US recessions

What’s in store for Australia?

Rising inflation, the slowdown in China, higher interest rates and the potential for a US recession would weigh on our economy. The Organisation for Economic Co-operation and Development still expects our economy to record aggregate GDP growth of 1.8% for this year, in line with its previous forecast.

However, the OECD has downgraded its forecast for GDP growth in 2024, with the economy now only expected to grow by 1.3% over the calendar year. Outside of the pandemic, this would represent the weakest two years of aggregate growth since the early 1990s recession.

The world economy meanwhile is expected to grow by 3.0% in 2023, before slowing down to 2.7% in 2024 and a disproportionate share of global growth in 2023-24 is expected to continue to come from Asia, despite the weaker-than-expected recovery in China.

GDP projected growth rates for 2023 and 2024 chart