Recession fears are now “back with a vengeance”, particularly in the US, and the path ahead for the Australian economy is worth watching closely, according to AMP chief economist Shane Oliver.

In his latest market note, Oliver noted that while the US economy is stronger than expected, more recession indicators are now “flashing red.”

Specifically, he pointed out, the resilience so far can be attributed to the long and variable lags with which monetary policy affects economic activity, with the shock of interest rate hikes being stretched by the reopening boost from the pandemic and household savings buffers .

Strong labor markets also partly reflect worker shortages, he suggested.

Now, however, falling labor demand is reflected in higher unemployment, and historically, once U.S. employment growth exceeds 0.5 percentage points, it tends to continue to grow and become associated with a recession, Oliver explained.

Last week, on August 2, those concerns were fueled by July US jobs data, which saw the unemployment rate jump to 4.3 percent, up from a low of 3.4 percent.

Acknowledging that the trend "has perfect results", he acknowledged that "relationships that have worked in the past do not always work in the future" and may have been distorted by the "one-off" 420,000 increase in labor supply in July .

"That said, it's hard to ignore and suggests, along with the still-inverted US yield curve and the decline in the US leading indicator, that the risk of a recession is now very high in the US," Oliver said.

In light of this, while Australia's economic performance has not been as weak as that of the US, he suggested there were several causes for concern that Australia could follow suit.

"We put the recession risk here at 50 percent," Oliver said, outlining six key considerations.

Interest rates have risen more in Australia than in the US, as measured by the mortgage rates people actually pay, he pointed out, while real spending by Australian households has slowed to a crawl.

Household debt service costs are also now a record share of household income in Australia, which is not the case in the US, and Australia has much more overpriced housing than the US.

“Australia's economic growth boost from record population growth looks set to slow next year by at least 1 percentage point. That more than offsets the boost from the tax cuts,” Oliver said.

In addition, Australia's job vacancies have been falling for two years, as recorded in the US, and this is likely to "affect a sharp slowdown in job growth and a rise in the unemployment rate, which is already at 4.1 percent from 3.5 percent cent,” he said.

The US recession, Oliver continued, also risks slowing global growth, "which will mean less demand for our exports and a knock-on effect through confidence".

Looking at all these factors, the economist admitted that "the risk of a recession is high."

Should the RBA reconsider rate cuts?

On Tuesday, after the Reserve Bank of Australia (RBA) kept interest rates on hold at 4.35% for a sixth consecutive meeting, Governor Michelle Bullock signaled that a rate cut was unlikely to be planned in 2024 as the central bank remained alert for potential upside risks.

A near-term rate cut "is not consistent with the board's current thinking," she said, clarifying that "near-term" means the next six months or the end of the year.

In his market note, however, Oliver said the central bank "should consider cutting interest rates."

"The cycle of global monetary policy easing is now underway. However, while lower interest rates are good for stocks, this is not the case initially in a recession and equity markets are signaling growing concern that central banks may have given up too late,” Oliver said.

"Central banks, including the RBA, may not have allowed enough for the 'long and volatile lags' with which rate rises affect growth and inflation, and so have tightened too much or left rates too high."

This is likely to have been exacerbated by the ongoing pause in deflation over the past six months in the US and then Australia, he said.

"Because central banks never know when they have raised interest rates enough to control inflation, they often go too far - leading to a recession," Oliver said, adding that this was the case before Australia's recessions in the early 1980s and the 90s of the last century.

"While the RBA still faces inflation that is too high given the US experience, it should now consider cutting interest rates as it now risks much higher unemployment and inflation falling below target," he said.