Australia is not in recession.

As much as I dislike the time spent speculating on such a definition, if I’m forced to pass an opinion, it’s looking like a mid cycle slowdown.

Irrespective, businesses adjust and we trade through the cycle.

Over the past 40 years, studies show that recessions are officially registered somewhere between 18 months and 22 months following the inversion of a country’s yield curve, being when the difference between the 2 year and 10 year bond yield trades into a negative percentage.

The jury is still out whether the 5 year minus 3 month yield is a better indicator to watch.

So back to the traditional 10 year minus 2 year…..and unlike the United States, the Australian yield curve is not inverted.

The red line in the chart below represents 0.00%.

The two things occurring which I think will invert this curve are;

1) an overzealous Reserve Bank of Australia hiking rates too much trying to correct the overly accommodating and subsidising government fiscal policy errors and;

2) a government which cuts off the nations (commodity supply and capacity) ‘nose to spite its own face’ by crimping production and export of gas, coal, iron ore and other minerals.

September 19, 2022

by Rob Zdravevski

rob@karriasset.com.au

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