Australia’s economic risks are rising with a trio of economic shocks set to smash an already slow growth rate.
In a grim market update, HSBC chief economist Paul Bloxham has sounded the alarm on the potential of a recession as the economy cools.
Australian Bureau of Statistics (ABS) figures released on Wednesday show the national economy grew by 2.5 per cent for the year.
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But it is starting to slow, with gross domestic product up just 0.3 per cent in the March quarter, significantly below the 0.9 per cent quarterly growth in December.
Mr Bloxham warned the Australian economy was now at risk of falling into a recession.
“Our view, since March, has been that GDP is likely to contract in Q2 – we see the collection of indicators above as supporting that view,” Mr Bloxham said.
“The risk is rising that there may be two consecutive quarters of falling GDP.”
A technical recession is two quarters in a row of negative GDP growth.
While the overall economic pie expanded, GDP per person slid 0.1 per cent for the first decline since March 2025 because the pace of growth was slower than the relative increase in the population.
AMP deputy chief economist Diana Mousina warned that even if Australia didn’t officially enter a recession, there were concerns.
“No doubt there will be concerns of a ‘per capita recession’ now – we have had plenty of those in the past without an actual technical recession occurring,” Ms Mousina said.
The worst is not yet over with economists warning the full force of three major economic shocks is still to hit and the damage could be severe.
According to HSBC, economic pain felt in March, April and May has severely weakened consumer sentiment.
“These include the RBA’s three back-to-back rate hikes and the Middle East conflict shock,” Mr Bloxham said.
“A third shock may have also arrived in the form of the budget – given it is expected to weaken housing prices and housing turnover and given the economic uncertainty that comes from substantially shifting tax arrangements.”
Oxford Economics Australia head of economic research and global trade Harry Murphy Cruise agrees, warning the Middle East conflict was only one month old in the March quarter, with expectations of things getting worse before they get better.
”Surging inflation, sky-high oil prices and shattered confidence will collide to crimp spending through the rest of the year,” Mr Murphy Cruise wrote.
”We expect per capita household spending to be broadly flat in 2026, while softer hiring will push unemployment close to 5 per cent through 2027.”
Petrol prices are set to batter the national economy. Picture NewsWire / Monique Harmer Credit: News Corp Australia
KPMG chief economist Brendan Rynne said the national economy had slowed to a crawl and there was no growth in sight.
“Australia has for some time had the rest of the world add to our economic prosperity through purchasing our goods and services, particularly our natural commodities, at increasing rates and often at increasing prices,” Mr Rynne said.
“Unfortunately, however, we aren’t in the same position today, with Australia, like most non-major oil producing countries, experiencing a negative term of trade shock due to the ongoing Middle East conflict.”
Working harder and getting less
Mr Bloxham also pointed to Australia’s productivity – measured by dividing GDP by hours worked – falling 0.6 per cent over the quarter.
It is now just 0.3 per cent higher compared with this time last year, tracking along a decade low.
“With inflation well above target and growth having been well above potential – given very weak productivity growth – we see the only likely pathway to getting inflation down over a reasonable timeframe is to push the economy into a downturn,” Mr Bloxham said.
In a press conference following Wednesday’s GDP release, Treasurer Jim Chalmers was quizzed on Australia’s slowing productivity.
“Despite all of the doomsayers and all those who want to talk the Australian economy down, we are seeing a boom in private investment and that is a good thing,” he said.
“In time, by seeing these investment figures flow through into our economy, that will be an important part of shifting what has been a couple of decades now of poor performances on productivity.”
The fall in March’s productivity came despite a three-day roundtable in August aimed at addressing the slowdown in output.
Deloitte Access Economics partner Stephen Smith said Wednesday’s results were “uncomfortable” but unlikely to stop further interest rate pain for households.
“The economy is cooling but not in a way that suggests inflation will fall neatly back to target,” he said.
“Productivity weakened again and unit labour costs remain elevated, meaning the Reserve Bank will see softer activity but not necessarily evidence of easing domestic cost pressures.
“A fourth rate hike in 2026 is still on the table.”
While the national economy is slowing and productivity growth is stalling, the RBA is still tipped to lift rates to get rid of persistent inflation.
ABS stats show yearly headline inflation fell from 4.6 per cent in March to 4.2 per cent in April.
This was due to the Australian government temporarily halving the fuel excise and giving back GST revenue, which in part eased some of the inflationary pressures.
But the all-important trimmed mean inflation rate – which the RBA watches because it strips out volatile and seasonal items – rose to 3.4 per cent for the 12 months to April, showing underlying price pressures are still in the Australian economy.
Both of these figures are above the RBA’s 2-3 per cent target.
“In the meantime, rising inflation expectations and strong wage pressures across industries will continue to worry the Reserve Bank,” Ms Mousina said.
“We therefore expect two more rate hikes in this cycle, taking the cash rate to 4.85 per cent by year end.”
Households continue to feel the pinch. NewsWire / Nicholas Eagar Credit: NewsWire
RBA governor Michele Bullock said many households were feeling the pinch, although she said higher interest rates over time would help ease rising cost-of-living pressures.
“As you know, the monetary policy board has increased the cash rate by 75 basis points in total this year,” she told a senate budget estimates committee on Thursday.
“These increases have been necessary to tighten financial conditions and slow growth in demand in the economy to ensure we get on top of inflation.
“We have already seen some signs that this tightening has worked, but it will take one to two years for the full effects to flow through the economy.”
The central bank has lifted the cash rate by 25 basis points at each of its three meetings so far this year in a bid to curb rising inflation.
“What these increases will do, however, is help to contain the domestic inflationary pressures and second round effects from higher oil and commodity prices,” Ms Bullock said.
“Now I recognise this is a difficult time for many households facing cost-of-living pressures, but it is important we bring inflation under control.”
Ms Bullock said lifting interest rates was the least worst option, with higher inflation having longer lasting impacts on everyone.
