An Aussie recession is now 'baked in'

today in Victoria and of course interest rate day as well.Plus we're a week out now from the Federal Budget next Tuesday night.Sky special with all of the experts covering that.Joining me now, Macro Business Chief Economist Leith Van Onselen.Leith, great to see you.Interest rate decision, three rises in a row, takes us back to where we were in November 2024.

Does that say that the Reserve Bank got it wrong back then?

Oh, absolutely.The Reserve Bank got it wrong.Look, they did misjudge it.They cut rates when they probably shouldn't have.And as a result, they're now reversing course and they've lifted it back to where they were.And based on their hawkish commentary today, as well as the financial market forecast, we're likely to get possibly another two rate hikes this year, which would take us to an 18 -year high, Steve.

So it's not good.

Had a couple of senior bank CEOs dancing around the word recession today, Leith.Is it too early to be starting talking about that?I mean, I hope it's too early, but what's your view on that?

Look, I think there's a very high chance of recession.So we've got consumer and business confidence are both tracking at the historical lows, even worse than the depth of the COVID pandemic.Obviously, we've got the global energy shock, which is likely to get worse before it gets better.Australia still faces a prospect of high fuel costs, as well as diesel shortages, all those sorts of things.And, you know, honestly, Steve, I think a per capita recession is hundred percent guaranteed and a headline recession that's, you know, two consecutive quarters of negative GDP growth is very likely at this point.I'm not sure when, but, you know, certainly over the next six months, maybe nine months.

I thought it was really interesting that Jim Chalmers and the Reserve Bank head, Michelle Bullock, completely different arguments about what's driving inflation.Here's Jim Chalmers saying it's all about the war.Well, that's what he said.And then, of course, Michelle Bullock comes out at her briefing and says, well, it'sthe inflation was built in into the economy already, that it happened before the war started.

Yeah, I mean, obviously, it's a bit of both.So before the war even started, the core inflation was tracking a fair bit above the RBA's target.So obviously, we've had a problem.We've got record government spending, those sorts of things.Then obviously, the war in the Middle East is just at the cherry on top.So it's basically a double whammy and this is why we're seeing three rate hikes in a row and we're likely to see possibly two more by the end of the year.

We saw the Australian newspaper got a drop today or they managed to get a leak about this idea of an income offset.whatever that actually means, of between $200 and $300, non -means tested, so everyone including me is going to get it, and you, Leith.Now, if you pay the wage and you pay tax, then you're going to get $200 or $300.Doesn't that go exactly against what the IMF and the ratings agencies are saying government should be doing, that they should not be fuelling inflation by doling out money?

Yeah, absolutely.So we've got a burnout economy here, Steve, whereby the RBA has got his foot planted on the brake, raising interest rates, desperately trying to slow the economy and trying to slow inflation, while the federal government's got his foot on the accelerator, spending big, handing out money, etc.So the last thing the RBA needs is for the federal government to be handing out money to taxpayers to spend, because doing so is just going to drive up demand and also inflation.It's the wrong approach.

You always have a very unique way of looking at changes in policy.This capital gains tax discount potentially being dropped and maybe the grandfathering even of negative gearing.What do you think that will do to rents and the property market?

Yeah, look, I think it'll put some mild downward pressure on prices, but for the rental market, I don't think it'll do much at all.For the simple reason that even if investors were to sell up, those properties don't disappear.Investors will then sell.them and they'll be bought by own occupiers, including first home buyers.So it could reduce rental supply, but also reduce rental demand.And look, the property lobby, to be fair, hasn't been, doesn't seem too concerned about the proposed changes to the capital gains tax.

We're basically going to go back to the pre -1999 method of indexing.And also there's some rumours that the federal government's going to keep negative gearing for newly constructed properties.constructed buildings, which means that we actually could see some more supply.So I don't think it's going to have much impact on the rental market.The biggest driver of rent, Steve, is actually immigration.The government's running a mass immigration policy that's driving up rents, obviously, and driving down rental vacancy rates.

The best cure for that is to cut immigration.

Now, Leith, I can see you're sitting down.I'm very pleased about that.I hope you're sitting down.The Victorian Treasurer, Jacqueline Symes, who I believe has got a law degree, handed down her Victorian Budget today.Have a listen to what she had to say before delivering the Budget in Parliament today.

Being in surplus means that we don't borrow to pay for wages, programs, depreciation, we only borrow for infrastructure.Borrowing for infrastructure is what a strong economy needs.It is an unrealistic expectation for current taxpayers to foot the entire bill for generational infrastructure projects that future generations get to benefit from.That is a responsible way of doing government.Some people disagree with that.Some people do.

But the alternative is you don't build infrastructure.

I don't speak economic gobbledygook.Leith, can you unscramble that word salad for me?

Look, it's pure gaslighting.So the biggest expense in the Victorian government is actually bureaucrats or public servants.And those numbers have absolutely exploded under Labor.As well, if you actually look at the infrastructureprojects that they're doing, like the suburban rail loop, most of them are garbage.They're over budget.

They're years behind.And they're going to cost us a small fortune.The fact of the matter is, Steve, unfortunately, I live in Victoria.We've become an economic sinkhole.We're over -regulated, we're over -taxed, we're drowning in debt, and we really have no competitive advantages over other states.And as a result, the annual interest bill for Victoria is projected to rise to about $10 .6 billion by 2029.

And what that equates to is $1 ,400 a year for every man, woman and child in Victoria will be paying just in debt.and debt repayments or interest repayments.And that's money that we can't spend on hospitals, schools and all these other things.So it's pure gaslighting.

$28 million a day we're paying just to pay the interest on the debt, and yet in the last three weeks you've had a Premier, Jacinda Allen, who's been in office in Victoria as a Minister for 12 years, wanting to get re -elected for another four.She's run around in the last two weeks, as you would have seen, Leith, spraying around $8 .2 billion in election sweetness.I mean, give us a break.

Yeah, when's it going to stop, Steve?I mean, you know, the net debt is forecast to go to nearly $200 billion.We've got all the global credit rating agencies threatening us with downgrades.We've already got the lowest credit rating in the country.Where is this going to end?I mean, if we get further credit rating downgrades, our interest bill is just going to spike even more.

We're going to be more overburdened by this debt.This is an absolute disaster, this government, and they need to be booted out fast.

100 % agree 100 % with everything you said.Thanks Leith, good to catch up to you Leith and Ansel in there.Still to come after the break.