The more big companies axe staff, the closer we get to a recession

You won't find NAB employees exiting their offices in Sydney and Melbourne carrying cardboard boxes with small ferns sticking out the top.

There's been no major financial or economic shock, notwithstanding ongoing oil market turmoil.

Instead, NAB's cold and brutal axing of 2,500 staff, announced this week, is a calculated move to make one of Australia's biggest companies nimbler.

"Our ambition and strategy remain unchanged," NAB Group Chief Executive Andrew Irvine said.

"We will improve productivity, risk outcomes and execution to be a simpler and more efficient bank."

It's not alone.

Late last year ANZ flagged a reduction in "duplication and internal complexity" as part of its own organisational restructure and, as NAB said on Tuesday, that there would be limited impact on frontline, customer-facing roles.

If the Commonwealth Bank and Westpac follow suit, along with other large non-bank corporations letting staff go, we might have a major problem.

Economic head winds

Australia's big four banks are operating in a challenging economic environment and, they insist, need to adapt.

The root of their problems comes from Australia's astounding inability to generate reasonable levels of productivity growth.

Productivity (as measured by the ABS as GDP per hour worked) was -0.2 per cent in the 12 months to June.

This means the national economy can only grow so fast before generating inflation, because businesses struggle to absorb the costs of production and so need to pass those costs onto customers when they demand goods and services.

Add to this an oil price shock, and the Reserve Bank has been forced to hike interest rates four times this year to tame inflation.

The Commonwealth Bank's chief economist Luke Yeaman says, in a worst-case scenario, the RBA may need to hike interest rates on Melbourne Cup Day, and again early next year.

"If you look at these structural factors, we've got a historic AI boom coming through the system, driving up inflation, driving up costs," Mr Yeaman said.

"You've got still strong government spending; you've got low productivity, and rising neutral interest rates around the world.

"So you put all that together and actually inflation might be much more persistent and the RBA may have to continue hiking rates through this year and even into early next year."

Cost crunch

It means the big four banks are being financially squeezed.

Money is seeping out of the housing market, for example.

The total number of new loan commitments for dwellings, according to the ABS's June quarter lending indicators report, fell 5.4 per cent.

The number of new investor loan commitments for dwellings fell 8.6 per cent in the quarter.

The bank's net interest margins or, very loosely speaking, the margin between the interest rate they pay depositors and the rates they charge borrowers, is also coming under pressure as interest rates rise.

Meanwhile, their combined profit after tax was $15.2 billion, down by 2.1 per cent compared to the first half.

Enter the lure of outsourcing roles offshore and rolling out artificial intelligence (AI), and you have several vehicles at management's disposal to cut costs in the face of weakening revenue.

There were no specific references to any of this in the NAB's public statements today, though.

"We are particularly focused on reducing the size of corporate functions," Andrew Irvine said.

"There will be no material impact to customer-facing banking roles.

"We have also deliberately made deeper changes to senior management positions which will broaden leadership responsibilities across the bank," he said.

Nimbler? Yes. How will this be achieved? That's harder to say.

Biting the hand that feeds you

Section 181 of the Corporations Act 2001 requires directors to "exercise their powers and discharge their duties: in good faith in the best interests of the corporation; and for a proper purpose".

The final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was submitted by Commissioner Kenneth Hayne who noted, "self-interest will almost always trump duty".

This was a reference to chasing profits for a company ahead of the best interests of the client.

For banks, at the very top levels, it's a painfully simple maths problem: grow revenue and cut costs.

It boosts the banks' bottom lines, which grows shareholder value and, in turn, lines the pocket of executives.

But is that too short sighted?

Those who have been let go from ANZ Bank and those about to be let go from NAB are facing a deteriorating jobs market, and rising interest rates.

If CBA and Westpac follow suit, it could be a real problem for the economy.

Because it's not just the banks letting go of workers.

Mining giant BHP last week confirmed job cuts at its iron ore operations in Western Australia.

And Microsoft announced it would cut 4,800 jobs, or about 2.1 per cent of its global workforce, in July.

The Reserve Bank wants to reduce "aggregate demand" in the economy to help lower inflation.

Governor Michele Bullock said it might take an unemployment rate of 5 per cent to achieve that.

You can see now, though, why Bullock could "possibly" see a recession in sight, given how many companies may choose to become "more agile" as times get tougher.

The negative feedback loop in the economy is plain to see: more job losses feed more job losses.

What is less clear is how much further interest rates can rise before that feedback loop is turbo-charged — though some in finance have a view on it.

ABC business editor Michael Janda asked panellists at the Citi Investment Conference in Sydney today how much further the RBA could raise interest rates before bigger cracks appeared in the mortgage market, with rising arrears and forced sales.

"I don't think it's a lot more," said James Boyle, the chief executive of major non-bank lender Liberty Financial Group.

"There's an increase in hardship … borrowers are doing it tough with rates at the current levels."

He added: "The stress is there if you go looking for it."

David Bailey, chief executive of large mortgage broking group AFG, agreed, saying inflation and falling real wages had eroded many borrowers' financial buffers.

"The cost of living has increased at the same time … that causes real cracks to start to appear," he warned.

"An extra 25 [basis points] is really starting to push the envelope."

Former NAB chief economist Alan Oster said, all else being equal, Australia would hit an unemployment rate of 4.8 per cent by early next year.

If the RBA hikes interest rates again, he said, it will move higher to 5 per cent. He characterised that as a recession.

With gross federal government debt of roughly $1 trillion, business confidence in the doldrums and weak productivity, the economy is in a particular vulnerable position to handle a corporate Australia race to the bottom in cutting costs.