Economy

For the last few decades, globalisation and disinflation have gone hand in hand. As multinational companies grew far beyond the confines of individual nation states, they were able to use technology, outsourcing and economies of scale to drive down prices. Cheap labour, cheap capital and cheap commodities kept them down. Now war in Ukraine has put an end to cheap Russian gas. The global push towards carbon neutrality will ultimately add a permanent tax on fossil fuel usage. Decoupling between the US and China means an end to “efficient” (aka cheap) but fragile supply chains. The end of quantitative easing and the Federal Reserve’s rate rises are putting a cap on easy money.Aspects of this new reality are welcome. Counting on autocratic governments for crucial supplies was never a great idea. Expecting countries with wildly different political economies to abide by a single trade regime was naive. Polluting the planet to produce and transport low-margin goods around the world doesn’t make as much sense when you tally in the true cost of labour and energy, not to mention changing geopolitics. More than three decades of falling real interest rates have resulted in unproductive and dangerous asset bubbles; we desperately need some price discovery in markets.All this said, there is no getting around the fact that a deglobalising world will also be a more inflationary one, at least in the short term. This will present a major challenge for both the US economy and the wider world.As Credit Suisse analyst Zoltan Pozsar told clients in a recent note, “war means industry”, be it hot war or economic war, and growing industry means inflation. This is the exact opposite of the paradigm we’ve experienced for the last half century, during which “China got very rich making cheap stuff . . . Russia got very rich selling cheap gas to Europe, and Germany got very rich selling expensive stuff produced with cheap gas.” The US, meanwhile, “got very rich by doing QE. But the licence for QE came from the ‘lowflation’ regime enabled by cheap exports coming from Russia and China.” All this is now changing. And that means even hawkish central bankers may not be able to control the inflationary environment. That’s a topic that was front and centre at the central bankers’ Jackson Hole conference recently, when economists Francesco Bianchi of Johns Hopkins University and Leonardo Melosi from the Chicago Fed released an important paper questioning how much monetary policy can do to bring down inflation if the fiscal position of the country is deteriorating.The core idea is that if rate hikes lead to recession, tax receipts go down and in lieu of spending cuts to the big stuff — such as entitlements and defence — or a default on Treasury bills, you get rising debt. When the debt picture deteriorates significantly, it gets harder and harder for monetary policy alone to curb inflation, so you get a snowball effect. The upshot? Unless monetary policy is accompanied by a more stable fiscal situation, rising inflation, economic stagnation and increasing debt will be the result. Central bankers have been begging politicians of both stripes to supplement their monetary efforts with appropriate fiscal policy for years. Now, the rubber is hitting the road. When interest rates rise, you ideally want less debt. That requires increased taxes or reduced spending. The first option relies on Democrats controlling Congress; it’s unclear how long they will, as November midterms loom. The second option is unlikely, given the fiscal investments inherent in a deglobalising, decarbonising world.Consider, for example, the cost of more secure supply chains. The US has just passed an act giving chipmakers $52bn in subsidies. Germany is spending $100bn on modernising its armed forces. The west is likely to spend $750bn rebuilding Ukraine, and the G7 recently announced plans to pump $600bn into infrastructure to counter China’s own massive Belt and Road Initiative. All that is, in the short term at least, inflationary. Then there are the challenges of ensuring production. “Inventory for supply chains is what liquidity is for banks,” says Pozsar, and “in the context of supply chains, leverage means excessive operating leverage.” He notes, for example, that some $2tn of German value-added production relies on $20bn worth of gas from Russia. What happens if that stops flowing entirely this winter? We may be about to see. There are important caveats to this story. Productive spending on things like infrastructure, high value goods and services and the transition to clean energy may be inflationary in the short term but ultimately bolsters a country’s fiscal position by fuelling longer-term growth. Indeed, these types of “productive bubbles” — in which the public sector provides incentives for investment into crucial technologies and new markets — enable periods of widely shared, sustainable growth.The question is how much of today’s spending will be productive, and whether governments will have the ability to cut what is not. Either way, in the near term, the end of the neoliberal globalisation era will be a tailwind to higher trend inflation. Just like deglobalisation itself, that represents a massive economic shift, which will herald all sorts of unexpected [email protected] More

With most of the world’s biggest economies having curbed pandemic restrictions, the mantra for the global events industry is “business is back”, following a difficult two years.But attendance at the Imex show in Frankfurt — which caters to the trade show and travel sectors themselves, with attendees including conference venues, event managers and hotel groups — is telling. The May event had about 9,500 participants, compared with 14,000 before the pandemic.“Obviously the industry has suffered during the past years, people have lost jobs, but demand has exploded,” said Carina Bauer, chief executive of Imex, adding that recent events had a “global range of exhibitors”.But she added: “We had very few participants from China this year.”The 32 per cent drop in attendance points to a mixed picture for the industry as the world reopens. The critical Chinese market remains stymied by restrictive lockdowns as Beijing pursues a zero-Covid policy. Meanwhile, convention centres and organisers elsewhere are still gauging whether demand for face-to-face meetings will return to pre-pandemic levels despite an initial surge.Imex chief executive Carina Bauer: ‘We had very few participants from China this year’ © ImexChina offered the events industry a sliver of hope two years ago when it became the first large country to cautiously reopen after the first phase of the pandemic.Now the tables have turned. While many wealthy countries have signalled that companies should not expect future restrictions on social mingling, China has chosen to impose travel restrictions, as well as lockdowns on cities when local coronavirus outbreaks occur.“We have no idea how to compensate for China if the country does not return,” said Wolfgang Marzin, chief executive of Messe Frankfurt, a German events organiser co-owned by the city of Frankfurt and the state of Hesse that runs trade fairs around the world.“Everybody took advantage of labour and production capacity in China — much still comes from there — and now we are as dependent on them as we are from oil for Mr Putin,” he added, nodding to the number of international companies manufacturing in the country.For now, Marzin said Chinese buyers and sellers were largely absent from events in other parts of the world. “The zero-Covid policy means that since January we don’t see Chinese companies,” he said. “For a show in textile, typically we would have around 400 exhibitors and now we have 25.”Marzin would not disclose the private company’s revenues and profits but said turnover this year was likely to be close to levels in 2010, adding that he expected the company to be back on track in 2025 — assuming the global economy is not derailed by further crises.Informa’s Arab Health 2022 trade show in Dubai. The company has maintained 2019 prices for its exhibitions to attract customers © InformaChina is not only an indispensable part of many companies’ supply chains, but the world’s second-largest economy has also emerged as an important buyer at trade shows.In 2019, mainland China accounted for 16 per cent of events revenues at Informa, the world’s largest trade fair group. In 2021, the company had recovered to only four-fifths of this level.But the FTSE 100 company is more sanguine about the situation in China, arguing that rebounding demand in the US has offset the lag.Both Marzin and Bauer are bullish about the eventual full-scale return of in-person meetings, so is Lord Stephen Carter, Informa’s chief executive.“The power of physical presence will not go away,” said Carter. “Even if China is opening at a slower rate than other countries, we know that it will be reopening.”The group has put its money where its mouth is, announcing last December that it would dispose of its intelligence arm and focus on events and academic publishing. It had unveiled an annual £1.1bn pre-tax loss for 2020 linked to lockdown-related exhibition cancellations. But in 2021 it swung back to a £137mn pre-tax profit as restrictions eased.Informa said in July that it would begin paying dividends again following a pandemic hiatus, brushing off a global economic slowdown that is threatening many industries. The group expects its revenue and adjusted operating profit this year to reach the upper end of previous guidance of £2.15bn-£2.25bn and £470mn-£490mn respectively.“All the events businesses I speak to are tremendously bullish,” said Citi analyst Thomas Singlehurst, who added that as exhibitions businesses tend to have a low cost base they could stand to be beneficiaries of surging inflation as they raised their own prices.“What’s interesting with events is that re-emergence of inflation could be the best thing that has happened,” he said, explaining that most growth in the industry came from pricing.Carter said Informa had maintained 2019 prices for its exhibitions in order to encourage as many customers as possible, but added that in the future “of course, there will be natural price inflation as you would expect”.Nevertheless, the industry remains under pressure. Of the three biggest listed events providers — Informa, Hyve and Relx — only the latter’s share price has recovered to the level of early 2020 and it is largely focused on subscription businesses such as academic publishing.But Hyve, which runs the annual retail shows Shoptalk and Groceryshop, has still struck an optimistic note, saying the 2022 editions either had or were expected to make more money than the year before Covid-19 struck.“Post-pandemic . . . our customers spend more with us than before,” said chief executive Mark Shashoua. The UK-based group reported revenue of £59mn in the first half of 2022, compared with £68mn for the same period in 2019. It blamed the delay of two large events in the mining and paper industries in the second half of the year for the decrease.There are predictions of a shakeout. Shashoua said some smaller or more niche shows were unlikely to return at all, even online, after the pandemic, with the largest groups such as Hyve who run the “must-attends” of various industries in a position to consolidate.This has already begun. In March, Hyve announced the acquisition of US-based Fintech Meetup for up to £42mn, a few months after it snapped up an events organiser focused on the mining industry for a similar amount. Meanwhile, Informa bought business-focused publisher Industry Dive in July, a deal that will grant it a content arm to better engage clients beyond events.For Informa’s Carter, future growth in the industry will come from an increase in the range of services that events companies can provide, with the main shows becoming “much more digitally enhanced [with more] sophistication at registering and profiling [buyers and sellers]”.“If you are operating with a tier-one product, demand is extremely high,” he said.

Video: China’s unseen war for strategic influence More

The European Central Bank’s sense of urgency in tackling inflation has overtaken concerns over the damage an aggressive rate increase would inflict to the eurozone economy ahead of a policy meeting this week.Several ECB rate-setters have said they are focusing more on current record levels of inflation to decide policy, moving away from an earlier, more dovish approach that hinged mostly on where they expected prices to be two years from now. The shift has led many economists to forecast a 0.75 percentage point rise on Thursday for only the second time in the central bank’s history — a move that would leave the benchmark deposit rate at 0.75 per cent. “There are no doves left at the ECB, only average hawks and uber-hawks,” said Katharina Utermöhl, senior European economist at German insurer Allianz.The ECB surpassed expectations in July by raising its deposit rate by 0.5 percentage points to its current level of zero, the first increase in more than a decade — and a bigger rise than president Christine Lagarde and its chief economist Philip Lane had flagged. The latest hawkish shift has been led by Isabel Schnabel, an executive board member, who emphasised at the Jackson Hole gathering of central bankers a week ago that the bank would be willing to raise borrowing costs to a level that would lead to higher unemployment and possibly recession to fight inflation. “The ECB president hasn’t spoken [on monetary policy] for six weeks — it would have been good to hear from her,” said Piet Haines Christiansen, chief strategist at Danske Bank. “She is more inclusive and doesn’t make up her mind until she has heard everyone else speak . . . But that puts her at risk of markets boxing the ECB into a corner in the meantime.”Jürgen Stark, a hawkish German economist and former ECB executive, asked in a letter to the Frankfurter Allgemeine Zeitung newspaper why Schnabel was delivering the key Jackson Hole speech and not Lagarde or Lane, suggesting there could be a “reallocation of responsibilities” on the bank’s board. Lane has continued to caution against the dangers of raising rates too aggressively. He told an event in Barcelona last week that there were “no shortcuts” to analyse the inflation cycle and he was confident inflation would soon fall from its “extremely high levels”. The ECB said Lagarde had been in “constant contact” with the 11 of its council members who were at Jackson Hole and pointed out that its president had not always attended previously.Isabel Schnabel has said the ECB would be willing to raise borrowing costs to a level that would lead to higher unemployment and possibly recession to fight inflation © Ralph Orlowski/ReutersAs well as raising rates on Thursday, the 25 members of the ECB governing council are also expected to discuss ways of pushing up banks’ financing costs. Policymakers want to restrict commercial banks from earning billions of euros in interest on some €4.5tn in deposits placed at the central bank. The ECB granted €2.2tn of subsidised loans at rates as low as minus 1 per cent during the pandemic to encourage banks to keep lending, but now that rates are rising this could generate more than €20bn for the private sector, which is politically unpalatable and contradicts efforts to tackle inflation.Some policymakers have even floated the idea of the ECB starting to shrink its almost €9tn balance sheet by reducing the amount of money it reinvests from maturing bonds in its €5tn securities portfolio. But this looks unlikely to be decided before October or December.Sven Jari Stehn, chief European economist at Goldman Sachs, said the “important shift” challenged expectations the ECB would halt rate rises should the eurozone fall into recession, as he and several analysts expected. Stehn highlighted that inflation would hit double figures before the end of the year, which would force the ECB to raise the deposit rate to 1.75 per cent by 2023. Calls for the ECB to join the US Federal Reserve in raising rates more aggressively were bolstered by eurozone data showing inflation surged to a record high of 9.1 per cent in August, while unemployment hit a record low of 6.6 per cent.But even before this, several factors were pushing rate-setters in a more hawkish direction. Wholesale energy prices soared to all-time highs in Europe last month on fears Russia would keep throttling gas supplies. While they have retreated in recent days, German power prices on Friday were still about 10-times higher than a year ago. Growth has been resilient despite the energy crisis, helped by supportive fiscal policy and the lifting of coronavirus restrictions. Meanwhile, the euro has fallen to near par with the dollar — pushing up inflation further through higher prices of imports, especially energy. Another element behind the shift is that, after underestimating inflation for a year, many ECB rate-setters are losing confidence in the models they rely on to forecast where prices are heading. Because the impact of monetary policy decisions take at least 18 months to affect the economy, those models previously provided the reference point for decision-making. “It was more or less impossible in our models to produce any inflation that would not be temporary,” Belgium central bank governor Pierre Wunsch, an ECB council member, said last week, adding that they always showed price rises falling to the 2 per cent target, regardless of the assumptions. “We have come to the conclusion that we know much less about inflation drivers than we thought.”Inflation was also now so high that, as Schnabel outlined in Jackson Hole, it risked becoming “an important reference point” for where consumers and businesses expect price pressures to be. Some ECB rate-setters still believe in its models. Greek central bank governor Yannis Stournaras said last week that inflation would soon “steadily decelerate” and urged only “gradual” rate rises to “ensure a soft landing” for the economy. More

European retailers could soon sell off excess inventory built up as a buffer during the pandemic as economic stress rises, according to the world’s largest operator of pallets. Brambles, the Australian logistics company, said global retailers had built up large amounts of stock to shield against supply chain problems during Covid-19. In the UK, retailers had also created a buffer of inventories to prepare for Brexit, which was due to be unwound in 2023 after the Christmas trading period this year.Graham Chipchase, chief executive of Brambles which owns the Chep pallet business used by most of the world’s largest retailers and consumer goods companies, said US and Australian economies were resilient but the outlook had changed in Europe and the UK.“There’s clearly more stress in the system,” he said, pointing to the war in Ukraine, soaring food and energy prices and rising interest rates as reasons for retailers to clear out excess inventory. “I think if anyone is going to realise that they want to unwind a bit quicker, it will be Europe,” he said. Brambles — which calls itself the “invisible backbone” of the global economy — has an almost unparalleled view of the world’s supply chain. It estimates that 80 per cent of the world’s consumer goods touch one of its 350mn blue-painted pallets at some point in the journey between production and sale. In the UK, where Chipchase is based, he said it would be “pointless” for retailers to hold on to excess stock if the country slid into recession and consumer demand collapsed. “It feels like there are a number of things driving people back to normal levels of stock rather than elevated ones,” he said of the British market. Brambles traces its roots to 1875 and takes its name from a young roustabout, or unskilled labourer, called Walter Bramble, who established a butchery business that later expanded into logistics and transport. The pallet pooling business was created after the second world war when the Australian government set up the Commonwealth Handling Equipment Pool, or Chep, using equipment left behind by the US army. Brambles acquired that business in the 1950s. Brambles has raised its outlook three times this year but has historically struggled to manage a consistent financial performance. It was derided two decades ago when its chair Don Argus told an annual shareholder meeting that the company had not lost 15mn pallets — they were merely “missing”. The company still “loses” 10 per cent of its stock, or 35mn crates, a year, each costing $20. It has started testing QR code-based tracking systems and is rewarding customers that return them quickly. It is also using more sophisticated techniques to find lost pallets. In one example, it found that thousands were disappearing in the “middle of nowhere” in the southern US. It used a drone to discover that a recycling company was hiding a huge mound of Chep crates behind walls of cheaper white models. The Australian company is also developing algorithms using digital information from pallets that will be able to identify bottlenecks in trade. Chipchase said that removing half a day of transit could add several days of shelf life for a food product, reducing wastage.Brambles was the subject of a A$20bn ($13.5bn) takeover approach this year from CVC, the private equity company, but they did not agree to a deal. Chipchase said Brambles was not a utility but was resilient during a recession. “People eat and drink the same amount and still require toilet paper,” he said. The energy crisis, however, had raised some concern within the company that people might steal its wooden pallets for fuel. “I hope they’ll go for other things to burn,” he said, noting that the blue paint would produce unpleasant fumes if used as kindling. More

Brussels is proposing wide-ranging powers to require businesses to stockpile supplies and break delivery contracts in order to shore up supply chains in the event of a crisis such as the coronavirus pandemic.Draft legislation seen by the Financial Times would give the European Commission considerable leeway to declare an emergency, triggering a series of interventionist measures aimed at preventing product shortages in critical industries. Businesses are unhappy after being briefed on the plan, which is intended to protect the single market from supply shocks. “We would be very concerned if this proposal was adopted in such an interventionist shape,” said Martynas Barysas, director for the internal market at BusinessEurope, which represents employers in the bloc.“It could oblige member states to override contract law, force companies to disclose commercially sensitive information, and share their stockpiled products or dictate their production under any type of crisis the commission decides upon,” Barysas said.Of most concern to businesses is a system of “priority rated orders” under which Brussels could direct what companies produce and who they sell it to, potentially breaching contracts with customers.Barysas said companies agreed with a proposal for a mechanism that would prevent a repeat of disruption suffered during the coronavirus pandemic, when some member states closed borders and restricted exports. But he said companies believed the current plan was too intrusive and should give business more flexibility.There is internal opposition to the plan, which was devised by Thierry Breton, the internal market commissioner, and it could change. One EU official said: “The instrument was meant to be targeted in scope, so as to address the risk of fragmentation in the single market in the event of [a] large-scale crisis. Now it is growing into an octopus of the planned economy, imagining it can stretch its tentacles across global supply chains and control them.”The final version of the proposals should be adopted by the EU commissioners on September 13 as a centrepiece of commission president Ursula von der Leyen’s State of the Union address the next day.According to the draft, the commission, consulting member states, would first declare “vigilance” when it detected a crisis could be coming. That would allow it to ask relevant companies for information about their supply chains and customers. It could ask governments to build up strategic stocks. Under some circumstances it could make these measures compulsory, on pain of fines.A second phase, requiring member state approval, would hand the commission powers to direct market activity and procure goods directly, again backed by unspecified fines for non-compliance. During the pandemic, the EU passed legislation allowing export bans on vaccines in retaliation for the US blocking shipments of shots to the bloc. Governments also asked companies to shift production to face masks, gowns and ventilators amid a global shortage.

EU officials say there are similar issues today with fertilisers. High gas prices have cut production by 70 per cent across the bloc and driven up prices for farmers. One said: “Over the past years we have risked shortages of masks, ventilators, vaccines, grain and fertilisers. Instead of improvising solutions, we need to be better prepared to anticipate and respond to the next crisis.”The official noted several countries had measures in place for strategic reserves and priority-rated orders, including the US Defense Production Act. “We have drawn a lot of inspiration from the Americans,” the official said. “We don’t list the products because we don’t know what the next crisis will be. But obviously we are not talking about yoghurt. They have to be vital for the economic and social activities of the single market.” More

The contraction shows that a recovery of the world’s third-largest economy remains fragile at best and is worrying at a time when the global growth outlook is turning increasingly pessimistic.The final au Jibun Bank Japan Services purchasing managers’ index (PMI) dropped to a seasonally adjusted 49.5, marking the first contraction since March. The figure was slightly better than a 49.2 flash reading but worse than a slight expansion in activity of 50.3 in July. The 50-mark separates contraction from expansion.”A renewed drop in services activity accompanied a further drop in manufacturing production, with the latter falling at the quickest pace since September 2021,” said Annabel Fiddes, economics associate director at S&P Global (NYSE:SPGI) Market Intelligence, which compiles the survey.”However, service providers noted a weaker drop in output than those seen at the start of 2022, when there was also a spike in infections, as pandemic-related restrictions have been eased notably since then.”Average cost burdens faced by services firms expanded at a marked pace in August due to hikes in energy, fuel and raw material costs, while firms continued to raise their fees modestly.The composite PMI, which is estimated by using both manufacturing and services, shrank for the first time since February, dropping to 49.4 from July’s 50.2 final.”It’s likely that Japan’s private sector will remain under pressure in the months ahead,” added Fiddes. More

SYDNEY (Reuters) – Asian shares slipped on Monday while the euro took a fresh spill after Russia shut a major gas pipeline to Europe, leading some governments there to announce emergency measures to ease the pain of soaring energy prices.The euro was down 0.4% at $0.9908 and looking likely to test its recent 20-year low of $0.90005 as markets priced in more risk of a European recession.Germany announced plans to spend 65 billion euros ($64.7 billion) on shielding customers and businesses from rising costs, while Finland and Sweden offered liquidity guarantees to keep power companies open.Oil prices jumped along with the whole energy complex as a holiday in U.S. markets made for thin trading conditions. News of more coronavirus lockdowns in China only added to the jittery mood.MSCI’s broadest index of Asia-Pacific shares outside Japan eased 0.1%, and Japan’s Nikkei was off 0.3%. Wall Street fared better as S&P 500 futures edged up 0.3% and Nasdaq futures 0.2%, though EUROSTOXX 50 futures were expected to open lower.The energy crisis is an added complication for the European Central Bank (ECB) as it meets this week to consider how much to raise interest rates.”Europe is faced with a dire energy outlook, with numerous anecdotes of firms cutting back production,” said Tapas Strickland, head of market economics at NAB.”The ECB will undoubtedly decide to hike rates this week,” he added “Markets are close to fully pricing in a 75bp hike after numerous ECB officials said they were leaning that way, though there is still likely to be a debate around 50 v 75.”EURO, STERLING STRUGGLECentral banks in Canada and Australia are also expected to raise interest rates this week, while Federal Reserve Chair Jerome Powell and several other policy makers will make appearances and are likely to sound hawkish on inflation.While the August U.S. jobs report showed some welcome signs of cooling in the labour market, investors are still leaning toward a hike of 75 basis points from the Fed this month.The two-year U.S. Treasury yield did fall almost 12 basis points on Friday and futures were trading flat on Monday amid general risk aversion.The shift to safety again benefited the U.S. dollar, which hit another two-decade high on a basket of major currencies at 110.040. The dollar was firm at 140.50 yen, just short of Friday’s 24-year top of 140.80.Sterling was struggling at $1.1481, after diving as deep as $1.1458 and levels last seen in March 2020 at the start of the pandemic.”We now expect the EUR/USD and GBP/USD rates to reach $0.90 and $1.05 respectively next year as the economic slowdown and the terms of trade shock hitting the region take their toll,” said Jonas Goltermann, a senior economist at Capital Economics. British foreign minister Liz Truss said on Sunday she would set out immediate action in her first week in power to tackle rising energy bills and increase energy supplies if she is, as expected, appointed prime minister on Monday.The strong dollar kept gold flat at $1,709 an ounce. [GOL/]Oil prices were supported by expectations gas prices would leap in Europe later in the day.”Ultimately, Germany would need to cut natural gas consumption by 15% to keep gas storage facilities from running empty,” said analysts at ANZ. “Gas rationing looks very likely, as even at 95% full, storage would only last 2.5 months.” OPEC+ is meeting on Monday and is likely to keep oil output quotas unchanged for October, although some sources would not rule out a small production cut to bolster prices that have slid due to fears of an economic slowdown. [O/R]Brent was up $1.54 at $94.56, while U.S. crude rose $1.38 to $88.25 per barrel. More

BENGALURU (Reuters) – Australian house prices will fall sharply this year and next as rising mortgage rates and cost of living pressures drag on demand, a Reuters poll found, but for many people buying a home will still remain far out of reach.Pandemic-related stimulus and cheap loans have nearly doubled house prices since the 2007-09 global financial crisis, increasing homeowners’ wealth, but that has also kept millennials and first-time homebuyers off the property ladder.After rising about one-third during the pandemic, home prices nationally sank 1.6% in July. It was the largest monthly drop since 1983 and dragged annual price growth down to 4.7%, from a peak above 21% late last year.Average home prices were expected to decline 6.5% this year, according to an Aug 15-Sept. 2 Reuters survey of 10 property analysts, versus an expected 1.0% rise in a May poll.A further 9.0% fall was expected next year. “The property boom is well and truly over as the surge in mortgage rates is pulling the rug out from under it,” said Shane Oliver, chief economist at AMP (OTC:AMLTF).”There are three reasons why this downturn will likely be deeper and the recovery slower than in past cycles: high household debt levels, high home price to income levels and an end in the long-term downtrend in interest rates.”The Reserve Bank of Australia (RBA) has already lifted rates by 175 basis points since May and is expected to hike by another half-point on Tuesday in an effort to contain surging inflation. [AU/INT]Markets are wagering the current 1.85% cash rate could be near 4.0% by the middle of next year. Banks have sharply raised borrowing costs on new fixed-rate mortgages and tightened lending standards.”The path of interest rates will dominate the housing outlook. A steep increase in mortgage rates between May and the end of this year will weigh heavily on house prices,” said Adelaide Timbrell, senior economist at ANZ.”Still, a substantial correction is required to return housing affordability and housing prices to fair levels.”It will also be a greater challenge for some of the more heavily-indebted households in a country, which currently has a record A$2 trillion ($1.4 trillion) of mortgage debt outstanding.ANZ, Bank of Queensland, Capital Economics and Knight Frank said average house prices would have to fall by between 10-35% – roughly the amount U.S. house prices tumbled during the global financial crisis – to make Australian housing affordable.Property prices in Sydney, the world’s second-most expensive housing market after Hong Kong, and Melbourne were forecast to fall 7.0-10.0% this year and 7.0% next.(For other stories from the Reuters quarterly housing market polls:)($1 = 1.4686 Australian dollars) More