Inflation and the Reserve Bank’s (RBA) response to it will be the make-or-break factors for the Australian economy this year, according to economists at ANZ.
In a recent research note, the big four bank’s economists said that, while the global inflation path is critical, slower local activity is also needed to bring down non-tradable inflation.
“COVID-19 stimulus has led to more resilience in some parts of the economy to rapid monetary tightening, compared with previous cycles,” noted ANZ senior economist Adelaide Timbrell.
Based on data released over the past week, ANZ suggested that this resilience may be waning, with spending down and building approvals at their lowest level since June 2020.
Additionally, while job vacancies remained strong at 444,200, they were down 4.9 per cent in the previous quarter.
“These are early signs, and they haven’t led to any easing in actual inflation yet, unlike in the US,” she said.
“Australia’s monthly CPI accelerated to 7.3 per cent y/y ahead of the impact of higher electricity bills. We expect that to hit in the December data. This adds a little upside risk to our Q4 CPI forecast of 7.8 per cent y/y.”
ANZ has forecast that the December unemployment figure, to be released on 19 January, will drop to 3.4 per cent and then remain in the mid-threes throughout the year. Meanwhile, wage growth is expected to peak at 4.3 per cent y/y with no wage-price spiral expected in 2023.
The RBA will announce its first interest rate decision of the year on 7 February.
“Strong jobs and monthly CPI data reduce the risk that the RBA will pause in February. Not that there was much risk anyway. We expect a 25 bp hike,” Ms Timbrell said.
ANZ previously downgraded its forecast for Australian GDP growth to 1.5 per cent year-on-year by the end of 2023, down from its earlier forecast of 1.8 per cent growth.
“We’re not forecasting a recession, but if inflation in Q4 surprises on the upside, this could put pressure on the RBA to hike above our current peak cash rate pick of 3.85 per cent,” said Ms Timbrell.
“This would increase the risk of a hard landing. On the other hand, a faster, earlier China reopening could pose upside risk to our outlook.”
According to surveys from Bloomberg, there is currently a 30 per cent chance of recession in Australia this year, compared to 65 per cent for the US and 90 per cent for the UK.
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.