The Reserve Bank of Australia (RBA) has predicted that GDP growth will slow to below 1 per cent by the end of this year due to the ongoing impacts of higher rates and inflation.
In its latest statement on monetary policy, the central bank lowered its expectations for GDP over the next two years, with growth predicted to slow from 1.6 per cent in the year to June (previously 1.7 per cent) to 0.9 per cent in the year to December (previously 1.2 per cent).
Australia’s GDP grew 2.3 per cent over the 12 months to March, according to the latest national accounts data, down from 2.7 per cent in the previous quarter.
“GDP growth is forecast to remain subdued over the rest of 2023, with GDP per capita declining over this period,” the RBA said in its August statement on monetary policy.
“The soft near-term outlook reflects subdued growth in household consumption as higher interest rates and cost-of-living pressures weigh on real disposable income. However, higher household net wealth – reflecting the recent increase in housing prices – is forecast to provide some support.”
After falling to 0.9 per cent later this year, the RBA then expects annual GDP growth will recover beginning next year, albeit slightly weaker than it had previously predicted.
Growth of 1.3 per cent is expected in the year to June 2024 (previously 1.4 per cent), 1.6 per cent in the year to December 2024 (previously 1.7 per cent), and 2.0 per cent in the year to June 2025 (previously 2.1 per cent).
“GDP growth is forecast to increase gradually from early next year, supported by household consumption and public demand,” the RBA explained.
“Household consumption growth is forecast to increase to around its pre-pandemic average, supported by a recovery in real income growth and a pick-up in household wealth. Exports will continue to be supported by the rebound in tourism and solid growth in education-related travel.”
The latest statement on monetary policy also includes new forecasts for the year to December 2025, with the RBA predicting GDP growth to rebound to 2.3 per cent.
On the consumer price index (CPI), the RBA has forecast that annual headline inflation will fall from 6.0 per cent as of June to 4.1 per cent in December (previously 4.5 per cent).
Headline inflation is then expected to continue declining to 3.6 per cent in June 2024, 3.3 per cent in December 2024, 3.1 per cent in June 2025, and 2.8 per cent in December 2025, entering into the RBA’s target range of 2–3 per cent.
Meanwhile, annual underlying inflation is forecast by the RBA to fall from 5.9 per cent as of June to 3.9 per cent by the end of the year, before reaching 3.1 per cent at the end of 2024, and 2.8 per cent at the end of 2025.
However, among the key domestic uncertainties outlined by the RBA in its statement on monetary policy is that inflation could be more persistent than expected.
“Underlying inflation is expected to take a couple of years to return to the inflation target range. However, it is possible that the easing in inflation takes longer than this,” it said.
“Services inflation is expected to remain elevated over the forecast period – taking signal from the persistence being experienced overseas – but there is a risk that it remains stubbornly higher than forecast.”
Among the other key concerns for the RBA are the uncertainty of the outlook for China, competing forces weighing on the outlook for household consumption, and the risk that good prices could decline significantly.
The RBA also left its forecasts for unemployment mostly unchanged, with the jobless rate expected to rise to 3.9 per cent by the end of the year, from 3.6 per cent in June, before climbing 4.4 per cent at the end of next year, and 4.5 per cent at the end of 2025.
Economists react
Westpac chief economist Bill Evans said that the RBA’s updated forecasts and commentary support the case for the central bank to remain on hold.
“Waiting to assess the cumulative impact of the rapid tightening cycle appears to be the dominant policy motive of late; and the August SOMP’s forecasts are based on a flat trajectory for the cash rate to achieve the target,” he said.
“The most respectable argument for higher rates is that the forecast – which are based on flat rates – does not see the inflation rate returning to the middle of the target band. It appears for this board that bringing inflation back to just ‘within’ the band is sufficient.
“Westpac is broadly comfortable with the RBA’s forecasts and the conclusion that rates have peaked prior to the first rate cut, which is likely for the September quarter next year.”
Economists at the Commonwealth Bank also share the view that interest rates have peaked, with expectations that the first rate hike will take place in March next year.
“From a monetary policy perspective we think that the RBA will not hike the cash rate again in this cycle. This is simply based on our take of the board’s reaction function from here,” said CBA senior economist Belinda Allen and economist Stephen Wu.
“The economic data will need to print stronger than the RBA’s updated forecasts for them to increase the cash rate again. And that is not our base case.”
The economists noted that the risks still sit with another hike, given “a resilient labour market, sticky services inflation, and the recovering housing market possibly boosting consumption”.
“The hurdle though is high,” Ms Allen and Mr Wu added.
