RBA predicts weaker economy for the rest of 2023 as cost of living pummels households

Australia’s economic output per person is forecast to shrink in the second half of 2023 as higher interest rates and the rising cost of living combine to pummel households, the Reserve Bank says in its latest update on the economy.

Wage increases have remained steady at an annual rate of about 3.7% across the first six months of this year, and will quicken modestly to about 4.1% by the year’s end, the RBA said its quarterly statement on monetary policy, released on Friday.

The RBA’s growth outlook for the coming years, with a small chance of a stint of contraction. (Per capita GDP is another story.) pic.twitter.com/XFXINV8Zpe

— @[email protected] (@p_hannam) August 4, 2023

While inflation pressures were generally easing since a peak last December, some components of the consumer price index are predicted to rise, such as for renters.

“Rent inflation is forecast to increase further over the period ahead as rental vacancy rates remain low, and as housing supply responds with a lag to population growth,” the RBA said, adding, “there remains a high degrees of uncertainty around the speed and extent of the decline in inflation expected in the period ahead.”

The 73-page report will be examined closely for signs the RBA’s cycle of 12 interest rate rises since May 2022 has come to an end. Prior to today’s report, only NAB among the big four banks was predicting the RBA would lift its cash rate above the current 4.1% rate.

On Tuesday, the central bank kept its key interest rate unchanged for a second consecutive month, while signalling it was prepared to increase borrowing costs again if needed to keep inflation on a downward slide.

Weakness in the economy includes a drop in retail sales in June and poor consumer sentiment, with many fixed-rate mortgage holders facing sharply higher interest rates when their loans expire in coming months.

Economic resilience despite the sharpest increase in interest rates in three decades, though, includes on-going strength in the labour market, with the jobless rate hovering near the lowest in fifty years. Dwelling prices, too, are on the rebound even with the headwinds of rising rates, boosting the paper wealth at least for much of the population.

Prior to today’s release of the forecasts, investors were rating the chance of an interest rate rise at the RBA’s 5 September monthly meeting at only about 5%, according to the ASX. The immediate response to the RBA was limited with little change for both the Australian dollar and stocks.

The economy was growing at an annual clip of 1.6% at the end of last month and is now projected to slow to 0.9% by the end of the 2023. That outlook is slightly pared from the 1% pace of expansion predicted by the RBA three months ago.

Taking into account a population growth of about 2% for this year, per-capita gross domestic product will be in retreat.

The economy is then tipped to rebound gradually, reaching a growth rate of 1.6% – or about the population’s expansion rate – by the end of 2024, and quickening to 2.3% a year later.

The forecasts also see headline consumer price inflation easing from a 6% annual rate in the June quarter just finished to 4.1% by the December quarter. The retreat will extend to the end of 2025, when it will be 2.8%, on a trajectory unchanged from the RBA report three months ago.

Underlying inflation that strips out more volatile measures will glide from 5.9% in the June quarter to 2.9% by the middle of 2025, finally falling back within the RBA’s 2%-3% target range.

The unemployment rate is forecast to creep from June’s 3.5% rate to 3.9% by the end of 2023 and 4.2% in a year’s time. By the end of 2025, it will be about 4.5% but still below pre-pandemic levels, the bank said, sticking to similar previous predictions.

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The economic forecasts were based on current market expectations that the RBA’s cash rate will peak “around 4.25%”. Those forecasts have it easing to 3.25% only by the end of 2025, the RBA said, a level that may disappoint households hoping for a bigger reduction by then.

The RBA, though, underlined a number of uncertainties to the outlook that could blow off track the economy and inflation – and therefore interest rates.

China’s “uneven recovery” from the Covid restrictions was listed as the top “domestic” uncertainty because a slowdown in Australia’s biggest export market by far will dent the demand for bulk commodity exports.

A further slowdown would also affect demand for education and tourism services provided by Australia, while also dragging on the economic activity of other export markets in east Asia, the RBA said.

Household consumption, meanwhile, was “subject to competing forces”. On the one hand, rising home values could boosting the “outlook for wealth” for home owners and their resulting spending more than currently expected.

House prices picking up again in much of the country – even as the full impact of past rate rises is still to land – may prompt people to spend more than the RBA is predicting. pic.twitter.com/OCSUHA0D44

— @[email protected] (@p_hannam) August 4, 2023

Similarly, the “resilience of the labour market” so far could “if sustained, contribute to stronger-than-expected outcomes for household incomes and consumption”, the RBA said.

Countering that, “weak real disposable income growth” – which has been negative for many for a couple of years – could have a larger-than-expected effect on spending particularly for those on low incomes, it said.

Higher interest rates may also encourage people to save more than expected, it said.

Other uncertainties include the inflation for goods falling faster than anticipated as a result of many central banks tightening monetary policy at the same time.

source: theguardian.com