ANZ has downgraded its forecast for Australian GDP growth to 1.5 per cent year-on-year (y/y) by the end of 2023, down from its previous forecast of 1.8 per cent growth.
The change was made to account for a sharper slowdown in household consumption growth during 2023 than the big four bank had previously factored in.
“We expect Australia will avoid recession, particularly given the tailwind from the recovery in net migration. We see flat-to-falling GDP per capita from mid-2023 through 2024,” said ANZ senior economists Catherine Birch and Felicity Emmett.
According to ANZ-observed spending data, household spending lost momentum early in the holiday season, which the bank said could signal the beginning of a cyclical slowdown.
“We see household consumption growth dropping from 6.0 per cent y/y at end-2022 to 1.5 per cent y/y by end-2023 as the catch-up in services spending runs its course, the cost of living eats into real incomes, and higher interest rates bite,” said Ms Birch and Ms Emmett.
“But large household savings buffers, the strong labour market and a further pick-up in wage growth will be protective factors. Significant pipelines of residential and non-residential construction work will also help cushion the slowdown in broader economic growth.”
ANZ’s Australian GDP forecast for the end of 2024 remains unchanged at 1.2 per cent y/y. The bank noted that global developments will be important for the domestic outlook.
“Recessions in the US and Europe will weigh on global growth in 2023 and, in turn, on Australia’s external accounts. But the expected recovery in China will be a positive,” Ms Birch and Ms Emmett said.
“The iron ore price has been a beneficiary so far, but Australia’s tourism and education exports will get a sorely needed lift if easing COVID-19 restrictions in China boost travel abroad.”
As for inflation, ANZ has slightly reduced its forecast and expects an annual peak in headline CPI of 7.8 per cent, rather than 8.0 per cent, will be reached in the fourth quarter of this year, reflecting lower-than-expected food price inflation and the annual CPI re-weighting.
“An extended period of restrictive rates will be required to bring inflation back to target, notwithstanding the slower growth trajectory,” Ms Birch and Ms Emmett predicted.
“We see the cash rate peaking at 3.85 per cent by May 2023, with no cuts until late 2024.”
However, underlying inflation is expected to be “particularly sticky” in ANZ’s view after hitting a forecasted peak of 6.6 per cent y/y in the fourth quarter of 2022.
Next year, the annual headline inflation rate is predicted to drop to 6.3 per cent in Q1, 5.0 per cent in Q2, 4.1 per cent in Q3 and 3.2 per cent in Q4.
Meanwhile, annual trimmed mean inflation is forecast to sit at 6.5 per cent in Q1, 6.2 per cent in Q2, 5.3 per cent in Q3 and 4.6 per cent in Q4.
“Our expectation of a sharp decline in headline inflation in 2023, largely reflecting easing global and supply-side pressures, will give the RBA some breathing room and help keep inflation expectations anchored,” said Ms Birch and Ms Emmett.
“This creates the opportunity for an extended pause, which will morph into a complete stop if the economy tracks the way we expect. But if it doesn’t, the global experience suggests the risks remain tilted towards a higher cash rate. Activity indicators will be a guide to the extent that demand and hence inflationary pressures are abating.”
