In its most recent update on the economy, the Reserve Bank forecasts that economy production per person in Australia will decrease in the second half of 2023. This is due to the combination of increased interest rates and an increase in the cost of living, both of which are having a negative impact on households.
According to the RBA’s most recent quarterly statement on monetary policy, which was published on Friday, wage rises have stayed stable at an annual pace of approximately 3.7% throughout the first six months of this year, and they are expected to quicken moderately to approximately 4.1% by the end of the year.
Although inflationary pressures have been largely reducing since reaching a peak in December of last year, it is anticipated that certain components of the consumer price index, such as rents, will continue to increase.
The Reserve Bank of Australia said that “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 also stated that “there remains a high degree of uncertainty around speed as well as extent of the decline in inflation expected in the period ahead.”
The RBA’s cycle of 12 increases in interest rates since May 2022 will be scrutinized in great detail in the 73-page report in search of indicators that the cycle may have reached its conclusion. Before the release of this study, the National Australia Bank was the only one of the big four banks to forecast that the Reserve Bank of Australia will raise its cash rate above the present level of 4.1%.
The key interest rate was left unaltered by the central bank on Tuesday for the second month in a row, despite the fact that the bank signalled that it was prepared to hike borrowing costs again if necessary to maintain inflation on a downward trend.
The economy is in a weak state, as evidenced by a decrease in retail sales in June and negative consumer sentiment. In addition, many owners of fixed-rate mortgages face significantly higher interest rates when their loans come due in the coming months, which will further exacerbate the situation.
However, despite the sharpest increase in interest rates in three decades, the labour market continues to show strength, and the unemployment rate is currently hanging near levels not seen in almost half a century. This helps the economy remain resilient in spite of the steepest increase in interest rates in three decades. Even with the headwinds of rising rates, housing prices are on the upswing, which is raising the paper wealth of at least a large portion of the population.
According to the ASX, prior to the release of the projections today, investors rated the possibility of an interest rate increase at the RBA’s monthly meeting on September 5 at only approximately 5%. This was before today’s release of the forecasts. The immediate reaction to the RBA was muted, with no movement seen in either the Australian dollar or stocks as a result.
At the end of the previous month, the economy was expanding at an annual clip of 1.6%; however, current projections indicate that this rate will decline to 0.9% by the end of 2023. The RBA projected a growth rate of 1% for the economy three months ago, but this prognosis is a little less optimistic than that.
If we take into account a population growth of roughly 2% for this year, the per-capita gross domestic product will be heading in the opposite direction.
After that, it is anticipated that the economy will gradually begin to recover, eventually reaching a growth rate of 1.6% by the end of 2024, which is equivalent to the expansion rate of the population, and then accelerating to 2.3% the following year.
According to the projections, the annual rate of change in consumer prices should decrease from the 6% seen in the most recent quarter ending in June to 4.1% by the next quarter ending in December. On a trajectory that has remained unaltered since the RBA study was released three months ago, the decline will continue until the end of 2025, when it will be 2.8%.
The underlying inflation rate, which excludes more volatile indicators, is projected to decline from 5.9% in the June quarter to 2.9% by the middle of 2025, eventually falling back within the range of 2%-3% that the RBA has set as its target.
From its current level of 3.5% in June, the unemployment rate is expected to climb to 3.9% by the end of 2023 and 4.2% within the next twelve months. According to the bank, by the end of 2025, it will be approximately 4.5 per cent, but it will still be below the levels that existed before the epidemic. This estimate is consistent with similar ones made in the past.
The market anticipates that the RBA’s cash rate will peak “around 4.25%” in the near future, which serves as the basis for the economic estimates. According to these projections, it would only decrease to 3.25% by the end of 2025, the RBA said, which is a number that may disappoint households that were hoping for a larger reduction by that time.
The “uneven recovery” of China from the Covid restrictions was mentioned as the leading “domestic” uncertainty. This is due to the fact that a slowdown in China, which is Australia’s largest export market by a significant margin, may damage the demand for bulk commodity exports.
According to the RBA, a further deceleration in economic growth would have a negative impact on the demand for education and tourist services offered by Australia, in addition to driving down the economic activity of other export markets located in East Asia.
While this was going on, “competing forces” were at work in the realm of household consumption. On the one hand, growing property values have the potential to increase homeowners’ “outlook for wealth,” and, as a consequence of this, homeowners’ spending may exceed what is now anticipated.
In a similar vein, the RBA stated that the “resilience of the labour market” up to this point “could, if sustained, contribute to stronger-than-expected outcomes for household incomes and consumption.”
“weak real disposable income growth,” which has been negative for many people for the past couple of years, might have a larger-than-expected effect on spending, particularly for those who are on low incomes, the report stated. This was in response to the previous point.
A number of other unknowns include the fact that the rate of inflation for goods has dropped more quickly than anticipated as a direct result of a number of central banks simultaneously tightening their monetary policy.