The US has entered a recession after its economy shrank for a second quarter in a row. Gross Domestic Product (GDP) in the US fell by an annualized rate of 0.9% in the second quarter following a steeper decline in the first quarter. 

The general definition of a recession is two quarters in a row of economic contraction. However, in the U.S. the economy is only deemed to be officially in recession after the National Bureau of Economic Research, says it is, which at the time of writing has not happened.  

Does this mean the US is actually in recession?

While two quarters of negative growth typically indicate a recession, it is a very unusual set of circumstances with unemployment at half century lows at around 3.6%. The US has added 2.7 million jobs compared to the end of 2021 which is why the Fed Chair Jerome Powell argues the US is not actually in a recession.  

It is not unexpected to see slowing growth amidst soaring inflation as central banks around the world do their best to fight inflation by lifting interest rates.  

What about Australia?

Economists are divided on whether Australia will also enter a recession next year. 

In Australia, unemployment remains very tight, at 3.5%. Inflation is at worrying levels, and according to Treasury, is expected to peak at 7.75% by the end of this year and not settle back to within its target band of 2% to 3% until June 2024. Inflation is especially high on essentials such as electricity, petrol and food which impacts most Australians.  

The Australian Sharemarket (S&P/ASX 200) appears to have shrugged off economic concerns and has rallied some 10% off its June low.  

The ASX company reporting season is underway and company results are faring better than many expected.  

It’s a very unusual environment that we are living in. High inflation and rising interest rates, yet a tight labour market with very low unemployment. The economy is delicately poised.  

Is a recession in Australia likely?

If the Reserve Bank of Australia (RBA) increases interest rates too fast, it could spook Australia into a recession. The RBA has gone hard with four interest rate rises in a row in a bid to fight inflation. The cash rate currently sits at 1.85% with further increases expected and priced in by the market. 

Given the low unemployment, the optimist in me feels that we will avoid a recession in Australia.    

As for what this means for investment returns, in an unusual economic environment, we are not without risks to the downside. However, at Hewison Private Wealth we build diversified portfolios and take a long-term investment approach which provides us and our clients with confidence moving forward, irrespective of underlying economic conditions.