Goldman Sachs Group Inc. has predicted the chances of a recession in Australia as well as New Zealand while warning of a sharp US downturn. The company sees a 25% chance of a recession in Australia over the next 12 months and 30-35% odds in New Zealand. The probabilities are warned to lift to 50-60% in case of a sharp US downturn.
Goldman economists apparently reviewed around 75 years of data to identify the greatest indicators of recessions and quantify the risks over the next year or so, William Nixon, Vice President, Global Investment Research, said in a research note Monday.
“Our base case is that Australia and New Zealand will avoid recession,” Nixon said. “We are mindful of downside risks, including recessions induced by some combination of weaker global activity, supply-side inflation, and tighter financial conditions.”
Rising interest rates and oil prices also appear to boost the odds of a recession, “although their close correlation with headline inflation mean they don’t provide much additional predictive power,” Nixon said.
“While the model captures global factors indirectly, it’s also true that recessions in Australia and New Zealand tend to be correlated with global recessions — particular recessions in the United States,” he said.
Australia’s central bank, the Reserve Bank of Australia, is in all likelihood to lift its key rate by 50 basis points for a third consecutive month on Tuesday to 1.85%, taking its combined tightening since May to 175 basis points.
Meanwhile, in New Zealand, policy makers are told to undertake a fourth consecutive half-point increase later this month by economists, taking the official cash rate to 3%.
The steep swiftness of hikes has increased the risk of an economic slowdown. Some economists, including those at Nomura Holdings Inc, UBS Group AG, and the Commonwealth Bank of Australia, are predicting rate cuts in Australia will begin as early as next year.
The RBA will publish a quarterly update of forecasts on Friday that’s widely expected to show downgrades to economic growth and employment and a sharp increase in the inflation perspective—in line with the Treasury’s perspective last week.
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