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KARA:

Filling in for Ruby Jones, I’m Kara Jensen-Mackinnon. This is 7am.

Yesterday the treasurer Jim Chalmers offered a grim warning to Australia: we could be on the brink of a global recession.
While Australians are already familiar with rising prices and rising interest rates, the global financial outlook is getting worse.

So what does it mean for us? And if a downturn happens, who will be most affected?

Today, national correspondent for The Saturday Paper, Mike Seccombe, on how the United States could be making a global recession more likely.

It’s Wednesday, October 12.

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KARA:

Mike, this week, organisations like the World Bank and the International Monetary Fund have sounded a warning that we could be in for a global recession, which is slightly terrifying. So I wanted to start with what these warning signs that we're seeing around the world right now actually are.

Mike:

You're absolutely correct. Major international organisations are warning very seriously the risk of a global recession is rising. And on Tuesday morning, Australia's Treasurer Jim Chalmers also warned that we're now at risk of a third major economic crash in the last 15 years.

Archival tape -- Jim Chalmers:

The world is bracing for the third downturn in the course of the last decade and a half. And if it goes that way, as many expect, this will be a very different downturn to the two others that we've had over the course of the last decade and a half.

Mike:

The first being the global financial crisis, the second being the COVID-19 crisis. And now this, which kind of flows on in a way from the COVID-19 crisis.

Archival tape -- Jim Chalmers:

A lot of Australians, I think, understand that the global economy is a dangerous place right now and they're trying to make sense of the various moving parts. And one of the reasons why our currency is low is because American interest rates are high and expected to go higher.

Mike:

So what are the conditions that are making these people worry? Well, obviously, there's the war in Ukraine, which has jacked up the price of energy, which goes into everything, of course. Then there's the slowdown in China. China being the only country in the world, of course, that has not let up on COVID lockdowns. So it's still sporadically locking down millions of its people. And China being the sort of factory of the world. But perhaps the most pressing issue at the moment is in the United States of America in the way they're dealing with their own inflation crisis.

Archival tape -- Jim Chalmers:

When there's a big and widening gap between US interest rates and Australian interest rates that risks putting downward pressure on our currency, that makes imports more expensive. And that has implications for inflation.

Mike:

So to put a bit of context here, if we go back to May 2020, it was a very different story at the height of the COVID pandemic. You know, much like Australia, the American economy had slowed dramatically. You know, inflation there was down to almost nothing. I think it was 0.1% at the bottom, which is obviously way below their central bank target of around 2% a year. So the fear then was that the economy was stalling and like many others, including ours, the US government was desperately trying to stimulate pumping money into the economy. The US Federal Reserve, their central bank, was holding interest rates effectively at zero. But then when the pandemic subsided, the US economy just roared back to life. You know, much like Australia, unemployment fell to very low levels, around 3.5%. The difference between America and Australia was that unlike us wages growth there, shot up as a result. It was nearly 7% in June. And that added further to inflation, which reached 9.1% that month.

Archival tape -- NBC News reader:

The cost of housing shelter up five and a half percent in one year. Electricity up 13 and a half percent. Natural gas up almost 40%. Breakfast, lunch and dinner is more expensive. Food up ten and a half percent. But this is where inflation is really biting.

Mike:

Now it's come down a bit off that peak, but it's still about 8%. And what makes US inflation such a significant crisis is that if their central bank aggressively lifts interest rates in the hope of squashing their domestic inflationary problem, the consequence of that is that it effectively exports its economic problems to the rest of the world.

KARA:

And that's because the US is obviously the world's largest economy and their economic problems are somehow making our economic problems here in Australia even worse. So how does it actually work that their domestic interest rate rises are threatening us with a global recession?

Mike:

Well, what makes the US different and what makes this a global problem is that the US dollar is essentially the world's currency. It's the reserve currency. So international trade is overwhelmingly conducted in American dollars. Financial institutions and corporations transact their business in them. Developing economies often have loans denominated in American dollars. So when the US hikes its interest rates, the value of the American dollar increases relative to that of other currencies. And right now, the greenback is stronger than it has been in decades. It's just enormously powerful relative to virtually every other currency in the world. And this, in turn, puts pressure on other central banks to raise their rates if they want to avoid seeing their currencies fall, which in turn makes imports more expensive when their currencies fall. Which fuels their inflation rate. So it becomes a vicious global cycle. You see the consequences all around the world, you know, Nigeria and Somalia. The strong US dollar is pushing up the price of imported food and fuel and medicine.

Archival tape -- NBC News reader:

In a surprising report, the United Nations warning the Fed risked causing significant harm to developing countries if it continues with these steep rate hikes. The UN Conference on Trade and Development saying interest rate increases to date will reduce poor countries' economic output by $360 billion over three years and additional increases would result in further harm.

Mike:

It's pushing places like Argentina and Egypt and Kenya closer to default on their debts because they've become that much more expensive to service. And it's discouraging foreign investment in developing economies and even quite advanced economies. You know, India, South Korea are having more trouble attracting capital because it's flowing to America where the interest rates are highest. If you look across the world, you can see the consequences all over the place. I mean, last week, more than a dozen countries, you know, Argentina, the Philippines, Brazil, Indonesia, South Korea, Britain, Switzerland, Norway and Australia, for that matter, raised their interest rates to try and keep up, I guess with this global semi coordinated rise in rates to try and keep up with the US. And this cycle appears to be just perpetuating itself.

KARA:

So Mike, if all of these factors are making the global economic situation worse and that's already playing out in a lot of countries around the world, as you say, why is the US continuing to pursue this policy so aggressively?

Mike:

Well, the US Federal Reserve chair, Jerome Powell, is insistent that he will not stop raising rates, quote, until the job is done unquote to curb domestic inflation. What the strong dollar does is makes all sorts of things cheaper for American consumers. You know, so if they're importing Swiss chocolates, those have become cheaper because the American dollar is stronger if they're importing British tea. Same deal. So all sorts of things have become cheaper for American consumers, which is great for Americans and great for the American government, but it's not great for the rest of the world.
In Australia, we were already facing some of the consequences of this action by the US. The consequences are that we're paying through the nose, you know, for rental accommodation and new home owners have seen their mortgages become less affordable on their biggest asset, you know, which is now worth less than it was when they paid for it because house prices are falling. All of this is due to these global factors really, it's not anything that the Australian Government's done, but we're all feeling the suffering to some extent.

KARA:

We’ll be back after this.

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KARA:

Mike, we've been talking about the impending global economic problems on the horizon, and in particular how central banks around the world have been frantically raising their rates to keep pace with the U.S. currency. So how has our central bank here in Australia responded to this crisis?

Mike:

Well, first thing to say is we're faring better than many other countries. The Australian dollar has fallen only about 11% against the US currency in the past year, which is far less than some. I mean, against many of America's biggest trading partners it's like 20%. That's relatively good for us. Inflation here has been much lower than elsewhere in the world and the Australian economy is still growing solidly and unemployment is at a near 50 year low. Still, almost all of us are suffering financially to some extent. Even before the spike in inflation, you know, average wages were barely keeping up with prices for about a decade. Well, now wages are going rapidly backwards relative to the inflation rate.

Higher interest rates has seen the price of houses fall for those of us lucky enough to own one. The RBA has been hiking rates strenuously to try and keep inflation in check and keep up with global counterparts. It's already raised interest rates 2.5 percentage points since May, but the pace does appear to have slowed. The most recent rise was only a 25 basis point increase, which is half what had been the previous four times. Nonetheless, Governor Philip Lowe said further rate increases were quote likely, unquote. So, you know, the pain isn't over yet.

KARA:

And Philip Lowe has sounded fairly confident here, I suppose, that these interest rate rises are going to get our economy back to normal. Does he actually believe that the Australian economy is healthy enough to weather a storm like this?

Mike:

Well, he's certainly talking optimistically, then again he was talking optimistically up until the end of last year about the fact that they wouldn't be raising rates until 2024 or something. So one has to take his prognostications with a grain of salt. But he says that households are still doing okay, largely because of the money handed out by the government during the COVID period and the savings they built up during that time. You know, many households now have built up what he calls a quite large financial buffer. On average, people are now two years ahead in their mortgage repayments. Their savings increased by something like 250 billion during the COVID period, both because of all the money the government was pumping into the economy and because people couldn't get out and spend it so much. So a lot of people are quite cashed up and, you know, are still spending, frankly, like drunken sailors, which is part of the reason we've got an inflation problem to start with. But of course, not everyone is in that same fortunate boat. New home buyers, for example. I spoke to Brendan Coates, who's the Economic Policy Programme Director with the Grattan Institute. And in his words, for new borrowers, it's going to be really tight because these people have borrowed four, five, six times their annual income and now rates are going up and they're really going to feel the squeeze. And the other point he makes is that this squeeze will be felt more intensely by those who bought a property to live in, compared with those who bought one as an investment because the latter group can take advantage of negative gearing. So in other words, they can offset 30 to 45% depending on their marginal tax rate of that increase in interest rates, through negative gearing. So it doesn't hit them as hard. But the group that's really feeling the squeeze is renters. Louis Christopher is the managing director of a market analysis firm called SQM Research, which surveys advertised rental prices every week. And he told me that capital city average rents are up 20% over just the last 12 months. Furthermore, there's hardly any available rentals. Vacancy rates are below 1%, 0.9%. So renters don't have much choice frankly, they've got to take what's on offer and what's on offer is very, very expensive.

KARA:

So it sounds like housing is going to be where this will really hurt people here in Australia. And Mike, we've all known for a long time that the property market here is fundamentally broken. So if you're saying renters and new home owners could be squeezed even further, what kind of impact is that going to have on people's day to day lives?

Mike:

Well, yes, the housing market is pretty grim. The thing to understand about housing costs is that they're not elastic. Right. You can't just pay half the rent. If your rent goes up, you still have to pay it, which means that you have to cut other things out of your spending so people don't go to the dentist or the doctor or they don't fill prescriptions for medicines. This is all according to Kasy Chambers, who's the executive director of Anglicare Australia, and she tells me things like that are the first expenditures to go. But other things that go are things like car insurance, that kind of stuff. She's been talking to people who are doing things like turning off the hot water to save money or going to bed very, very early so they can turn off the heating in their house. Cold, she says, is a big issue. Fortunately, we're almost at the end of winter, but still people are having to cut out what are not even really considered discretionary items. Right. It's not like they're cutting out, going to the movies or something. They're cutting out things like food. People are missing meals and people who have somewhere to live are doing it tough. But Chambers says that Anglicare is seeing more and more people who just can't afford rent. So they're couch surfing with friends or they're moving into cars and tents, that kind of thing. So as she says, you know, it's a very difficult road to come back from there. The people most affected by this, you might call the working poor, you know, people struggling to afford rents as it is. And these are not the sort of people with whom central bankers or world leaders or the heads of multinational corporations or even mum and dad property investors usually consort with or think about when it comes to their decisions. But they are the people who are really getting trampled by this.

KARA:

And finally, Mike, Australia fared pretty well during both the global financial crisis and the COVID-19 pandemic. We were pretty insulated, at least compared to a number of other economies around the world. But if this economic situation now does get as bad as some people are fearing, are we really prepared for what it's like to live through a recession?

Mike:

Look, I don't think so. I think this will just magnify a whole lot of structural problems, like, for example, a housing crisis, like the inequality that was already evidently increasing in Australia. This could serve to magnify that. To be perfectly frank, I've got to say, predictors don't look good. I mean things. Things are crook. And all the indications are that things are going to get more crook.

KARA:

Mike, thank you so much for your time.

Mike:

Thank you.

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KARA:

Also in the news today,

A day after the NSW premier urged caution around flood waters, Victoria’s premier has warned Victorians living in flood zones to stockpile three days worth of food.

The Bureau of Meteorology is predicting a ‘significant rain event’ to begin on Wednesday, with the majority of the rainfall happening Thursday.

And in Europe, Russia's missile strikes against civilian targets in Ukraine have been condemned around the world.
In a coordinated attack missiles struck at least ten cities in Ukraine, including the capital Kyiv.

With no military value to the attacks, the missile strikes appear to a retaliation for Ukraine’s weekend attack on the Russian constructed bridge linking Crimea to Russia.

I’m Kara Jensen-Mackinnon, this is 7am. See you tomorrow.

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