Frank Uhlenbruch, investment strategist in the Australian fixed interest team at Janus Henderson, said that while the economy will slow, a recession is unlikely.
“We expect to see the impacts of rapid monetary tightening progressively show up as we go through 2023. In our view, tightening monetary conditions and slowing consumer spending will see the rate of economic growth halve to 1.5 per cent over 2023,” Mr Uhlenbruch said.
“Such a growth rate is below Australia’s trend growth rate, and we should see some slack emerge that helps resolve demand and supply imbalances.
“While a recession is not our base case, it remains a significant risk given the uncertain paths for the Russia-Ukraine conflict, energy prices and offshore central bank tightening.”
Although inflation is still high, Mr Uhlenbruch said it is set to ease over the next couple of years back into the top of the RBA’s 2 to 3 per cent target band.
“Nearer-term inflation pulses are expected to come from higher fruit and vegetable prices following recent flooding and the re-introduction of fuel excise rates in the December quarter. Higher gas and electricity charges will also be a significant driver of inflation over 2023,” he added.
“With few signs yet of a significant slowing in activity and risks that the latest round of inflation pulses end up being recycled into a higher core inflation rate via pass-through effects, the RBA has little choice but to tighten monetary conditions further.”
Janus Henderson expects the cash rate to peak at 3.6 per cent in mid-2023, which Mr Uhlenbruch said would make the current tightening cycle the “largest and fastest in the monetary policy inflation targeting era”.
“As we expect to see growth and inflation decelerate over 2023, the door opens for the RBA to take its foot off the monetary breaks in 2024 and begin bringing monetary settings back towards more neutral levels,” he said.
“We see the balance of risks tilted towards our high-case scenario, one where the RBA has to do more to stop higher inflation [from] becoming entrenched. In this scenario, the cash rate is expected to peak at a restrictive 4.35 per cent by the end of 2023 and remain at that level until late 2024.”
