The Commonwealth Bank (CBA) has issued a significant revision to its forecast for GDP in 2022 and 2023 on the back of the Reserve Bank’s (RBA) latest rate hike.
CBA said that a faster and higher tightening cycle than initially expected along with higher inflation had led it to downgrade its forecast for annual GDP growth in 2022 to 3.5 per cent, down from 4.7 per cent previously.
Furthermore, the bank expects that the annual growth rate will slow further in 2023 to a below-trend of 2.1 per cent compared to its earlier prediction of 3.1 per cent growth.
“Economic booms cannot run indefinitely. But not all booms are followed by busts,” commented CBA head of Australian economics Gareth Aird.
“Our expectation is that Australia’s current economic boom has a little further to run and the labour market will remain tight so we don’t foresee a bust. But growth momentum is anticipated to slow materially by late 2022 due to a swift and aggressive RBA tightening cycle.”
Mr Aird said that the 50-basis point hike to the cash rate this month indicated that the RBA board had decided to front load the tightening cycle.
Based on this, CBA has predicted another hike of 50 bps which will take place in July followed by further hikes of 25 bps in August, September and November to bring the cash rate to 2.10 per cent, which it deemed as significantly contractionary.
There is also a risk that the RBA may lift rates by 50 bps rather than 25 bps in August, CBA said, which would see the cash rate reach 2.35 per cent by year’s end.
“The RBA looks very intent on dropping the inflation rate quickly. But this will come at the expense of growth in aggregate demand, particularly household consumption,” said Mr Aird.
“Our central bank appears to now be first and foremost inflation fighters and their objective of ‘the economic prosperity and welfare of the people of Australia’ has taken a back seat to their desire to drop the rate of inflation.”
No further rate hikes are expected in 2023. Instead, CBA believes that the RBA will actually cut the cash rate by 50 bps during the second half of next year.
According to the bank’s forecasts, headline inflation will peak at 6.25 per cent in 2022 before falling back with the RBA’s target band of 2 to 3 per cent by late 2023.
The unemployment rate is predicted to be 3.75 per cent over 2022 and then 4.5 per cent over 2023 as a result of the anticipated below trend growth.
On house prices, CBA said it was confident that growth as measured by CoreLogic’s capital city benchmark had reached a peak in April, just before the RBA’s first rate hike in over a decade.
Prices across the country are now forecasted to fall by around 15 per cent over the next 18 months, with Sydney and Melbourne suffering the greatest declines.
“The expected falls in home prices are significant. But context is key,” said Mr Aird.
“Price gains in 2021 nationally were extraordinary. And therefore a contraction in dwelling prices is a natural response to rising interest rates given it was record-low interest rates that drove the phenomenal lift in prices in 2021.”
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.