AMP’s Shane Oliver has predicted that a sharp slowdown in economic growth and a possible recession will lead to lower inflation ahead of next year, enabling the Reserve Bank of Australia (RBA) to cut rates.
“While we are allowing for two more 0.25 per cent rate hikes from the RBA in the next few months, we expect it to cut rates four times next year,” Dr Oliver said in his latest insights report.
Acknowledging the “remarkable” resilience of the Australian economy, despite a 400 basis points rise in the official cash rate and a significant boost in mortgage rates, Dr Oliver warned that ongoing positive trends provide “little comfort”.
According to him, similar to the 1980s and early 1990s, it is “a classic case of the economy being ok until it’s not”.
“Interest rate hikes normally impact with a lag of up to 12 months as it takes time for rate hikes to be passed through to borrowers, for borrowers to cut spending and for companies to cut their workforces,” the chief economist explained.
“This time around the lag is likely longer thanks to massive pandemic fiscal stimulus which left many households with much higher-than-normal savings balances, the release of pent-up demand with reopening, 40 per cent of home borrowers at record-low fixed mortgage rates (compared to a norm of 15 per cent) and a highly competitive mortgage market that has blunted the flow through of rate hikes.”
AMP has already revised its Australian GDP growth forecast down to just 0.7 per cent for this financial year compared to the RBA’s forecast for growth of 1.4 per cent.
But as a result of ongoing rate hikes, it believes the risk of a recession starting later this year sits at a “very high” 50 per cent.
“Consumer spending is almost certain to start going backwards later this year as the 4 per cent plus cash rate will push debt servicing costs into record territory as a share of household income and on the RBA’s analysis 15 per cent of households with a variable rate mortgage (about 1 million people) will be cashflow negative by year-end at a 3.75 per cent cash rate and we are now well beyond this,” Dr Oliver said.
He warned that this recession would be very different from the slowdown experienced in 2020, during which incomes were protected by programs like JobKeeper. A recession later this year, he added, would mean higher unemployment, less job security, and a likely “further leg down” in home prices.
Highlighting implications for investors, Dr Oliver acknowledged that “times like these can be stressful”.
“For superannuation members and most investors, the best approach is to stick to an appropriate long-term investment strategy to take advantage of the rising long-term trend in share markets given the difficulty in trying to time short-term swings,” he said.
Historically, he noted, recessions in Australia have tended to be associated with bear markets in shares — falls exceeding 20 per cent — as recessions drive a slump in company profits.
“A modifying factor is that share markets are still 8 per cent or so down from their 2021/early 2022 highs so the risk of recession is arguably partly still factored into markets which may limit the extent of falls if a recession does eventuate,” Dr Oliver added.
Earlier this month, Dr Oliver said there was plenty of evidence to suggest the Reserve Bank had “already done enough” to slow the economy and bring inflation back to target.
“We are seeing clear evidence of slowing demand in terms of falling real retail sales, falling building approvals, slowing plans for growth in business investment, slowing GDP growth, and early indications of a slowing jobs market,” the chief economist said at the time.
But while he assessed the RBA should leave rates on hold for several months to allow more time to gauge the impact of past rate hikes, he acknowledged the central bank’s tightening bias will very likely persist.
As such, AMP now believes the cash rate will rise to 4.6 per cent.
Continued high inflation and the increasing push for wage growth are expected to put significant pressure on the RBA, especially due to the higher-than-anticipated minimum and award wage hikes, which Dr Oliver said are threatening to take wages growth beyond levels consistent with the inflation target.
“Reflecting this, we are allowing for another 0.25 per cent hike in either July or August and another one in September taking the cash rate to 4.6 per cent,” said Dr Oliver.
“As a result, we see the risk of recession as now very high at around 50 per cent.”
Maja's career in journalism spans well over a decade across finance, business and politics. Now an experienced editor and reporter across all elements of the financial services sector, prior to joining Momentum Media, Maja reported for several established news outlets in Southeast Europe, scrutinising key processes in post-conflict societies.