The year ahead...

While it was largely overlooked in the rush to Christmas, the December record inflation rate of 7.8 per cent, the highest in 33 years, is  prompting increased speculation that the Reserve Bank will continue to push domestic interest rates higher.

The risk of that is, as interest rates climb, the pressure on household and small businesses everywhere will steadily mount and eventually, there will be a tipping point where economic activity will start to slow.

While most media analysts talk about a recession occurring when there are two quarters of negative growth in the economy, there is no hard and fast rule as to when a recession occurs.

The closest definition is that it is usually a period of prolonged high unemployment and a generally feeling that times are pretty tough for a growing number of people.

I don't believe the Australian economy will fall into recession this year. It may well come close but with continued record high prices being paid for most of Australia's key exports, its difficult to see domestic demand falling much.

However, the outlook could be starting to change. Anecdotal evidence suggests there are a number of industries coming under pressure, where staff numbers are being cut and if this continues, there may well be cause to think a recession is occurring.

The first key industry is the construction industry. Spurred on by the Federal Government's pandemic initiatives and record low interest rates, Australia has been undergoing a construction boom in recent years.

However, the failure of a large number of construction firms, caught by spirally costs and fixed price contracts combined with higher interest rates suppressing demand for new houses and renovations, is causing a large number of lay-offs.

This is never a good thing. The domestic building industry is a key driver of local economic activity and employment levels in the building industry directly feeds into the standard of living for households and communities everywhere .

Another sector hard hit are high profile internet based businesses. These boomed through the pandemic as people were forced to stay home but are now facing a new reality in the post-pandemic world and so, are reviewing their staffing needs.

Nearly 200,000 tech jobs have been lost in California according to Layoffs.fyi as global tech giants, Alphabet, Amazon, Meta and Microsoft have cut back hard on staffing numbers.

While California is along way from Australia, it is difficult to see similar staff cuts not occurring here in the local offices of these companies as well as other simliar Australian companies.

Finally, while we haven't seen significant staffing cuts among the Australian Banks, that is not the case globally with many large international banks, deciding now is the time to tighten their collective belts and reduce staff numbers.

Again it is diffult not to see this being replicated locally.

So while employers are still reporting staff shortages in Australia, and it is almost impossible to find a coffee shop where there isn't a help wanted notice in the window, there are real fears mounting that the impact of higher interest rates will be employers cutting back on staff numbers.

If this does happen, if there is an uptick in domestic unemployment rates, then that could drag the economy down into a recession and cause real pain in households everywhere. Definitely a year to be cautious.