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Will Australia face a recession in 2023? It could depend on the RBA

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Experts believe Australia's central bank holds the key to whether or not the economy tips into a recession.

Markets globally have been volatile for the past several months. Investors weigh fret over the likelihood of a looming recession for major economies such as the United States and Europe amid aggressive monetary tightening by central banks.

By comparison, Australian markets have been far more positive. Our commodities-heavy economy has ensured that many key sectors are still going strong and inflation has not spiked as much.

But will this scenario sustain? Or will the effects of inflation and monetary tightening catch up in 2023?

Why the economy could be at the "mercy" of the Reserve Bank of Australia (RBA)

Deloitte Access Economics has outlined a bleak outlook for the year ahead. The consultancy firm said Australia's economic growth will slow dramatically in 2023 as the consumer-led recovery runs out of steam.

Key factors that could create economic headwinds include falling house prices, rising interest rates, high inflation, low levels of consumer confidence and negative real wage growth.

Deloitte is forecasting economic growth of just 1.7% in the 2023 calendar year, down from 3.6% in 2022.

It believes the key to whether or not Australia faces a recession could depend on the RBA and how it plans to deal with high inflation that is expected to peak at 7.2% this financial year.

"Any further increases in the cash rate beyond the current 3.1% could unnecessarily tip Australia into recession in 2023," Deloitte Access Economics partner Stephen Smith said in a new report.

The report showed that based on the Reserve Bank's own estimates, mortgage repayments including principal and interest are already on track to rise to a record high as a share of household disposable income over coming months.

"At the same time, real household disposable income per capita – a key measure of prosperity – is falling, and will finish the current financial year at levels last seen before the onset of the pandemic. There is no doubt that Australian households are starting to hurt," Smith continued.

The RBA raised its benchmark cash rate 8 consecutive times in 2022, from a record low of 0.1% to a decade high of 3.1% as inflation accelerated following unprecedented pandemic-era stimulus and the end of COVID-19 lockdowns.

"Combined, there is an Everest of evidence to suggest interest rates should stay on hold from here. Will that evidence be enough? Australians are indeed at the mercy of the RBA in 2023," he added.

What this means for stocks

For a year full of turbulence for global financial markets, Australian shares didn't do too badly in 2022. Compared to a 19% decline in the S&P 500 and 33% in the Nasdaq Composite, Australian shares fell just 5% over the year. The local index has in fact recovered all those losses since then.

But if the RBA continues to lift interest rates in 2023 resulting in a slowing down of domestic economic activity, there could in turn be downward pressure on corporate earnings.

"It is not good news for the retail industry, which has fared relatively well over the past 12 months following the relaxation of COVID-related restrictions," Smith said.

"The outlook for retailers is far less rosy as cost of living pressures hit households. The finance and insurance industry is also expected to see more modest near-term growth as the industry adjusts to a higher interest rate environment."

This comes when a cloud is already hanging over corporate earnings over prospects of weaker economic growth overseas.

Slowing global demand due to the likelihood of recessions in the US and Europe poses downside risks for Australian growth and profits even as our biggest market – China – slowed sharply due to COVID-zero policies that were only recently reversed.

That could mean ongoing volatility for stocks, with some experts predicting the market are not likely to see much gains this year. They are urging investors to adopt a cautious approach through this tricky period.

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