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If investment firm Deutsche Bank's forecasts hold true, Australia will enter a recession next year.
- Deutsche Bank expects Australia's unemployment rate to rise by one percentage point to 4.5 per cent by the end of 2023
- The RBA's unemployment forecast for the end of 2023 is much lower, at 3.7 per cent
- A one percentage point drop qualifies as a recession under the bank's definition, but is not a technical recession
However, the bank has not worked with the accepted definition of "technical recession" to produce its forecast.
A recession is traditionally defined as two consecutive quarters of negative economic growth (GDP).
Instead, Deutsche Bank looked at where it believes the unemployment rate is heading.
It expects Australia's unemployment rate will spike higher next year, as the economy slows.
"We expect Australia's unemployment rate to end 2023 at 4.5 per cent, that is, one percentage point higher than the current unemployment rate at 3.5 per cent," Deutsche Bank chief economist Phil O'Donoghoe said.
The RBA's unemployment rate forecast for the end of 2023 is significantly below that at 3.7 per cent.
"If our forecast is realised, that would qualify as a recession on our definition, even if — as our forecasts assume – gross domestic product (GDP) avoids two consecutive quarters of negative growth," he said.
"We have long considered that 'technical' recession definition singularly unhelpful for Australia.
"From a welfare perspective, a one percentage point rise in the unemployment rate within a year is a far more useful description," Mr O'Donoghoe argued.
Labour market economist Leonora Risse disagreed.
She does not think that referencing a large increase in the unemployment rate is reasonable way to measure an economic recession.
"A recession means going backwards," Dr Risse said.
"So economists think of recessions as the economy slowing down so much that economic activity is actually declining, and total economic activity is less than it was in the previous quarter.
"Technically we need to see two quarters of consecutive negative growth in GDP for the economy to be officially classified as being in recession.
"It's possible to see a rise in the unemployment rate, but for the economy not to have slowed down to the extent that it's in a recession."
So, what could drive unemployment higher?
Much depends on how shoppers or consumers respond to the already announced interest rate increases by the Reserve Bank.
"Consumer spending has been supported by past gains in incomes, asset prices and accumulated savings during the pandemic," Reserve Bank deputy governor Michele Bullock noted in a speech earlier this month.
"However, these sources of support are being eroded to some extent by high inflation, rising interest rates and falling housing prices, and this is expected to contribute to a slowing in consumption growth from early next year."
Deutsche Bank's forecasts highlight the economy's dependency on ongoing robust consumer demand.
"At face value, the shock to household financial obligations that is already underway points to significant downside risks to the RBA's consumption forecasts," Mr O'Donoghoe said
"But households can draw on pent-up COVID savings to smooth consumption.
"We expect they will do that, the question is by how much?"
One driver of economic growth missing from the economy in recent years has been strong wages growth.
The government is currently trying to pass its industrial relations bill through the Senate.
Part of the bill is a proposal to widen access to multi-employer bargaining — a form of enterprise bargaining that sees employees from within an industry band together to negotiate higher pay.
The Bureau of Statistics will release updated data on how much extra Australians are being paid on Wednesday, with the official Wage Price Index for the September quarter.
The unemployment rate for October will be released by the ABS on Thursday.