When Yield Curves Fail: Australian Experience

The belief that yield curve inversions forecast recessions fails most spectacularly in Australia in the post-1990 era. As shown above, the 3-month/10-year slope inverted multiple times in the post-1995 era. However, none of these inversions coincided with recessions in Australia (albeit financial turbulence did hit the country).
As a disclaimer, I am using "bank-accepted bills" as the 3-month rate, and so, the curve would flatten in response to credit spread widening. I am working with data from the Reserve Bank of Australia (courtesy of my new research platform), and so, I am forced to deal with some limitations. My guess is that the Australian government bill market is too thin to provide a reasonable time series for bill rates.

The chart above depicts Australian real GDP growth rates. (Source is the OECD, downloaded from DBnomics, once again courtesy of my new research platform.) I am showing the 2-quarter growth rate on an annualised basis to make it easy to spot any episodes of two quarters of declining GDP. After the very early 1990s, there was only one decline in the chart (in 2000), but that was only a single quarter of declines. Therefore, on the "2 quarters of declining GDP" definition of recession, Australia has avoided one since the early 1990s.
Interestingly enough, this has nothing to do with fiscal policy - Australia is one of the few developed countries to run persistent fiscal surpluses at the federal level. (I have not added these data yet...)
... Read more