Australia’s biggest recession risk isn’t interest rates

Australia's largest recession risk is not rising interest rates, but fuel shortages, particularly diesel. The Reserve Bank of Australia (RBA) is expected to increase the official cash rate by 0.25% on Tuesday, with the probability of two more hikes over the next six months, leading to a cash rate of 5.10%. This could push the economy into a technical recession, according to economists.

However, this is not the biggest threat to the economy. Fuel shortages, especially diesel, are a more significant concern. Australia is the world's largest importer of diesel fuel, with a much higher reliance on imports compared to other countries. This is due to refinery closures and reduced imports by other countries. Sky UK reported that Australia's diesel reserves are very low.

A 10% reduction in diesel supply would have a severe impact on sectors like mining, construction, transport, and agriculture, effectively shutting down parts of the economy. Unemployment would rise, and higher energy costs would lead to cost-push inflation, prompting the RBA to raise rates further. This combination of rising fuel prices, potential shortages, increased interest rates, and a housing downturn could lead Australia to a technical recession in 2027, along with a deep per capita recession.