Recent rate rises push economy into ‘dangerous’ territory
Recent economic data suggests monetary policy may have gone too far with Australia now facing the prospect of a “deep per capita recession”, according to the latest Deloitte forecast.
The Reserve Bank of Australia may have already done “too much” with interest rate rises, with Deloitte Access Economics forecasting that the Australian economy will grow by just 0.9 per cent in the 2023–24 financial year.
“For comparison, the economy grew at an average annual rate of 2.4 per cent over the previous the decade, and 2.6 per cent in the decade before the pandemic,” the latest Deloitte Access Economics Business Outlook said.
Deloitte Access Economics partner Stephen Smith said the outlook is much worse when removing the effect of population growth.
“A deep per capita recession is expected over the next two years. In 2025, economic activity per person in Australia is expected to be around the same as in 2021, indicating that prosperity has stalled,” said Mr Smith.
The Deloitte outlook said the full the effect of the 400 basis points of interest rate increase to date is yet to be seen.
“Deloitte Access Economics remains concerned that too much has already been done by the RBA given that most of the inflation in the system stems from supply side issues – a fact confirmed in recent research by the RBA itself – and is therefore largely immune from monetary policy,” said Mr Smith.
“Price growth which is primarily caused by issues of supply – be it global shipping costs and import prices, the costs of a disorderly energy transition, or higher rents and house prices because of a handbrake on housing construction –cannot be readily solved by higher interest rates.
“The danger that monetary policy has already been tightened too much – a danger that Deloitte Access Economics has been consistently warning about for several months – is more than evident in recent economic data.”
The RBA was right to pause interest rates at its meeting in early July as it waited for information about the impact of previous increases given the pace of inflation has peaked and is moderating, wage growth is not excessive, and medium term inflation expectations have not risen, according to Mr Smith.
“It was notable, however, that outgoing Governor Lowe dropped a reference to keeping the economy on an “even keel” in his statement announcing the Julys monetary policy decision, despite those words appearing in each of the ten preceding statements dating back to August 2022,” he said.
“Instead, the July statement said the RBA Board “is still expecting the economy to grow”. That’s a considerably lower bar.”
Deloitte Access Economics is forecasting underlying inflation to average 4.2 per cent in 2023–24 and return to the RBA’s target band of 2–3 per cent in 2024–25.
Mr Smith said that rising housing and utilities costs will lead to a more gradual deceleration in the various measures of underlying inflation in Australia than has been observed in other countries to date.
Risk of August rate rise ‘still very much alive’
The tightness of the workforce in recent ABS data may increase the RBA’s concerns about wages growth staying higher for longer, according to AMP.
AMP deputy chief economist Diana Mousina said the strong employment figures for June may see the Reserve Bank of Australia look to raise rates next month over concerns about a tight labour market threatening the outlook for inflation.
Employment figures for June remained strong with employment growth increasing 32,600 over the month above consensus estimates of 15,0000.
The unemployment rate was unchanged at 3.5 per cent with the participation rate dipping to 66.8 per cent.
“The unemployment rate bottomed at a near 50-year low of 3.4 per cent in October 2022, reached 3.7 per cent in January and has moved sideways between 3.5–3.7 per cent since January,” said Ms Mousina.
“Clearly, the labour market is still very tight with the unemployment rate at multi-decade lows.”
The RBA were expecting the unemployment rate to be at 3.6 per cent by June, Ms Mousina noted, with the actual outcomes beating their estimates.
While the unemployment rate is expected to climb higher from this point, the latest employment figures “keep the risk of 0.25 per cent rate rise in August very much alive”, she said, taking the cash rate from 4.1 per cent to 4.35 per cent.
“Next week’s June quarter inflation data will be the final determining factor before the RBA’s August board meeting,” Ms Mousina said.
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