Australia’s economy is set for a “sharper, longer slowdown”, major bank economists say, as the Reserve Bank is forced to keep interest rates higher to rid the nation of persistent inflationary pressures.
The RBA is widely expected to hit mortgage holders with a fifth rate hike on Tuesday, in a move that will push the cash rate to its highest since 2008 amid rising worries the economy could even be tipped into recession.
Belinda Allen, the head of Australian economics at CBA, said the extended Middle East conflict, collapsing house prices and a more aggressive central bank would drive real GDP down to just 1% by the middle of next year, nearly half the previous estimate of 1.8%.
Growth through 2027 would be barely stronger at an estimated 1.1%, according to the updated projections.
Allen said she had expected to see “signs of economic recovery” by the New Year, but now sees the economy “bottoming deeper and later”.
This more pessimistic outlook was “mainly given oil has been a lot higher than we had been expecting,” she said.
“Most people thought we would see a resolution to the Middle East conflict by now and oil [prices] looking more normal. Alas, that has not been the case.”
Instead, Brent crude, the global oil price benchmark, has surged from about $US72 a barrel in early July, to back above $US110 in recent days as the conflict broadens and hopes for a peace deal in the near future have all but disappeared.
After Jim Chalmers last month warned the December mid-year budget update would show a more pessimistic economic outlook, analysts at NAB also revealed a major downgrade to their forecasts.
Gareth Spence, the bank’s head of Australian economics, said “unemployment might need to rise higher than we thought” in order to get inflation back under control – a view he said reflected recent comments by top RBA officials.
The economy would grow below trend over 2027 and 2028, Spence said, echoing the forecast of just 1% growth next year.
Spence forecast the key jobless measure would need to rise from 4.7% to as high as 5.4% by the end of next year, as the RBA doubles down on its battle to regain control of inflation.
The CBA forecast was more optimistic, seeing unemployment peak at 5.1% over the same timeframe.
Either way, the RBA’s multi-year strategy of bringing inflation to heel without sacrificing post-Covid employment gains now looks unlikely to be achieved.
As union leaders protested against the anticipated rate hike in front of the RBA’s offices in Sydney on Monday morning, Spence said the risk was that the central bank would have to hike again.
The deteriorating economic outlook comes as new data showed Australia’s property slump remained on track to be one of the deepest on record.
Shane Oliver, AMP’s chief economist, said home prices could fall by as much as 15% before levelling off late next year, with Sydney property values already down by 10% from their recent peak.
Drawing from RBA research, Oliver said a property correction of that magnitude could deliver a substantial hit to the economy, as worried homeowners pull back on spending – a phenomenon known as the “wealth effect”.
A weakening property market will also weigh on homebuilding, Oliver said, adding to the multiplying pressures on the economy.
While an economic contraction was not his “base case”, he warned there was a “significant and rising” risk of recession, the chance of which would rise to as high as 45% should the RBA hike as expected on Tuesday.
“We don’t know the tipping point.”
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