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Is Australia headed for recession?
On Wednesday, the deputy governor of the Reserve Bank of Australia warned the outlook for the global economy was not good.
"It's on a bit of a knife-edge," she said.
Less than 48 hours later, the Bank of England said Britain was probably already in recession.
There are growing concerns about the United States, which looks to be heading towards recession.
And China's economy is straining under the pressure of its zero-COVID policy and problems in its gargantuan property market.
Will a recession in Australia be inevitable?
A 'probable' recession
RBA officials say that, at this point, they still have confidence Australia can avoid a recession.
They say our exceptionally-tight labour market, and the level of savings in the economy, can hopefully insulate Australia from any negative shocks that originate overseas.
But not everyone is optimistic.
Some economists suspect that, because so many countries are lifting interest rates in an uncoordinated frenzy, global growth will slow dramatically in the next 12 months and Australia won't be able to avoid the fallout.
Jo Masters, the chief economist of Barrenjoey, says a probable recession is "on the cards" for Australia.
Why? Partly because the RBA will be forced to keep lifting interest rates as long as other countries keep doing so, and it will take Australia's economy into recessionary territory.
The RBA's cash rate target is currently 2.35 per cent.
Ms Masters said her modelling suggested a cash rate around 3 per cent would be sufficient to bring inflation back down into the RBA's target band by early 2024, but the RBA will probably end up lifting the cash rate to 3.35 per cent.
"This will have economic consequences – weakening the growth outlook and seeing the unemployment rate lift," she said.
"B*Eco modelling suggests this would drive the economy into recession."
And what will happen once Australia's in recession?
Ms Masters said when domestic economic activity starts weakening rapidly next year, the RBA will end up cutting rates again to stimulate activity.
And those rate cuts will occur towards the end of next year.
So, the RBA will lift rates by more than it would like in coming months - pushing the economy into recession - and then it will start cutting rates to make the recession as painless as possible.
"This should be sufficient to leave any recession as relatively short and shallow, and perhaps that is what is needed to cement the path back to 2-3 per cent inflation," Ms Masters said.
She thinks the RBA will lift the cash rate target by 0.5 percentage points next month, from 2.35 per cent to 2.85 per cent.
Cash rate heading to 3.6 per cent?
Bill Evans, Westpac's chief economist, has made a similar argument.
In July, he was already forecasting the RBA to lift the cash rate target to 3.35 per cent, but this week he lifted that forecast higher.
He said the stubborn outlook for high inflation and wages growth in the US, and rising interest rates globally, had changed his mind.
He said he, too, suspected the RBA would lift the cash rate by another 0.5 percentage points next month.
But he now thinks the RBA will eventually end up lifting the cash rate target to 3.6 per cent by early next year.
He said since global central banks were planning to keep lifting rates, the RBA would have to follow suit to stop the Australian dollar losing too much value.
Why? For similar reasons to Ms Masters.
If foreign currencies were allowed to gain too much value against the Australian dollar, it might encourage foreigners to buy more Australian goods and services than they otherwise would have, and that would make it harder for the RBA to squeeze inflation out of Australia's economy.
Mr Evans said that was a key reason why the RBA won't want Australia's cash rate to lag too far behind the US's key interest rate.
"Recall that the key reason why the RBA reluctantly adopted quantitative easing in 2020 was maintaining competitiveness in the Australian dollar," he said.
"The RBA governor would be concerned that such a sharp widening of the expected yield differential with global rates will have implications for a weaker Australian dollar complicating the inflation challenge."
At this point, he thinks Australia's economy will grow by just 1 per cent in 2023.
Overall, he thinks central banks are taking the policy of 'least regret' by erring on the side of containing inflation "at the potential cost of growth in the near term."
Turning policy back decades
David Bassanese, the chief economist at BetaShares, also thinks the RBA will probably lift the cash rate target by 0.5 percentage points next month.
He said the RBA won't want Australia's dollar to lose too much value against other currencies.
"At US66c, the Australian dollar has already fallen 13 per cent from its peak of US76c in April this year," he said.
"My expectation is the Australian dollar will end the year at around US62-63c."
So, is there a clear coordination problem between global central banks?
As central banks everywhere lift rates to kill inflation, it's creating pressure for those same central banks to keep lifting rates to prevent their currencies losing value against other major currencies.
Meanwhile, the speed and breadth of the rate hikes globally is pushing the world's major economies towards recession.
Earlier this week, RBA deputy governor Michele Bullock was asked if there was a case to be made for some coordination among global central banks to stop the damage that's occurring from rising US interest rates and a strengthening US dollar.
But Ms Bullock pushed back against the idea, saying it would turn policy back decades.
"Exchange rates can play a very positive role," she said.
"In Australia, we've typically thought of it that way because it gives us flexibility and the ability to run our own policies, to a large extent, without necessarily having to follow what others are doing in other countries.
"We're not entirely immune, but it does give us more flexibility."
She said she didn't think global central bank coordination was the right thing to do in this situation, despite everything.
"In a sense, the US dollar is responding to relative economic conditions, and inflation and interest rates in the US, relative to other countries," she said.
"That's what you would expect."