Just one more rate hike from the Reserve Bank (RBA) could tip Australia into a recession, according to a new report by Deloitte Access Economics (DAE).
The report has predicted that Australia’s economic growth will slow dramatically in the year ahead, with the GDP forecast to expand by only 1.7 per cent in 2023 versus 3.6 per cent in 2022.
Following an unprecedented 300 basis points of monetary tightening between May and December last year, DAE partner and report lead author Stephen Smith opined that any further hikes beyond the current cash rate of 3.1 per cent “could unnecessarily tip Australia into recession”.
“On the Reserve Bank’s own figuring, mortgage repayments, including principal and interest, are already on track to rise to a record high as a share of household disposable income over coming months,” he said.
“At the same time, real household disposable income per capita — a key measure of prosperity — is falling, and will finish the current financial year at levels last seen before the onset of the pandemic. There is no doubt that Australian households are starting to hurt.”
Consumer spending, which DAE said helped Australia rebound from the pandemic, is now tipped to fall over the next six months, even as higher prices drive up the value of spending.
“Australia’s consumer-led recovery is rapidly running out of road, with the combination of falling house prices, rising interest rates, high inflation, low levels of consumer confidence, and negative real wage growth expected to combine to see spending growth decelerate markedly over coming months,” said Mr Smith.
The looming risk of a recession comes after financial market participants were “burned” by RBA governor Philip Lowe in 2021, Mr Smith said, with home buyers also “burned” in 2022.
“This trend need not continue into 2023,” he suggested.
Mr Smith also acknowledged the possibility of further rate hikes by the RBA, describing the central bank as an “institution under pressure” facing inflation well above its target.
“Some may feel that a hawkish, inflation-fighting flex is a means for the RBA to heal some of the recent self-inflicted scarring of its reputation. That would be a mistake,” he argued.
“Combined, there is an everest of evidence to suggest interest rates should stay on hold from here. Will that evidence be enough? Australians are indeed at the mercy of the RBA in 2023.”
