Further rate hikes could put Australia into “unnecessary” recession – economist

Dire predictions made ahead of the central bank's next meeting

Further rate hikes could put Australia into “unnecessary” recession – economist

News

By Mina Martin

The Reserve Bank of Australia has been urged to pull the breaks on interest rate hikes – or risk putting Australia into “unnecessary” recession.

Consumer spending is predicted to drop in 2023 driven by a combination of declining house prices, surging interest rates, red-hot inflation, low levels of consumer confidence, and negative real wage growth.

Stephen Smith, Deloitte Access Economics’ partner, expected that fall to be a key factor in explaining why Australia’s economic growth forecast was downgraded from 3.6% in 2022, to 1.7%, news.com.au reported.

“The strength of the consumer in rebounding out of the pandemic lockdowns and back into shopping centres was an important reason why Australia’s economy has grown at pace over the last 12 months,” Smith said. “Unfortunately, it’s also an important reason why Australian economic growth is expected to slow dramatically throughout 2023.”

Overall, the DAE’s Business Outlook predicted an average 3.6% unemployment rate in 2022-23.

Commodity prices are also forecasted to remain higher for longer than expected, delivering a boost to the government’s bottom line.

Australians, however, will continue to be at the “mercy” of the Reserve Bank, Smith said.

Last month, RBA lifted rates for its eighth consecutive month to 3.1%, with the minutes from the board meeting’s decision not ruling out the possibility of further rate hikes in the new year to curb inflation.

According to DAE’s report, any further rate hikes beyond the current 3.1% could “unnecessarily tip Australia into recession in 2023,” news.com.au reported.

“On the Reserve Bank’s own figuring, mortgage repayments, including principal and interest, are already on track to rise to a record high as a share of household disposable income over coming months,” the report said. “At the same time, real household disposable income per capita – a key measure of prosperity – is falling and will finish the current financial year at levels last seen before the onset of the pandemic. There is no doubt that Australian households are starting to hurt.”

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