Australia (Commonwealth)_Australia’s major banks have revised their growth forecasts for the economy downwards, citing reduced household spending in response to aggressive interest rate hikes. This comes after a surprise interest rate rise earlier this month and strong job growth in May. Westpac, NAB, Commonwealth, and ANZ have all downgraded their economic growth predictions for 2023 and 2024. Economists at Westpac and ANZ even anticipate a per-capita recession within the next year, marked by two consecutive quarters of negative GDP growth per person.
These downgraded forecasts follow the Reserve Bank’s more optimistic outlook, which projected a 1.2% increase in GDP for 2023 and 1.7% for 2024 in its May Statement on Monetary Policy. However, the Reserve Bank has since raised interest rates by another 0.25 percentage points to 4.1% in June, marking the twelfth-rate hike in just over a year. Governor Philip Lowe warned that further rate rises were possible as the bank tackles high inflation.
The rate hikes have already started to impact consumer spending, with households cutting back on non-essential items to cope with higher interest bills. As a result, Westpac’s chief economist, Bill Evans, now expects the economy to grow by just 0.6% in 2023 and 1% in 2024, primarily due to weak household consumption growth. Despite the economic challenges, Treasurer Jim Chalmers remains confident, highlighting strong employment figures and claiming Australia is better positioned than most countries to face the upcoming obstacles. However, the government has faced political pressure from the Greens, urging the treasurer to overturn the RBA’s rate decisions, and the Coalition, which believes productivity needs to be boosted. ANZ economists expect further interest rate hikes in July and August, which could lead to a near-12-year high cash rate. They predict GDP growth of only 1% in 2023 and 1.3% in 2024, with per-capita GDP likely to decline until the second half of 2024.
The latest labor force data shows a decrease in the unemployment rate to 3.6% in May, with an additional 76,000 people finding work. However, ANZ economists have revised their growth forecast downward due to signs of cooling in the job market, such as increased underemployment. Westpac anticipates the unemployment rate to rise to pre-pandemic levels by the end of next year, which could potentially meet an alternative definition of a recession. Commonwealth Bank’s head of Australian economics also noted signs of labor market loosening through increased underemployment and highlighted that only half of the RBA’s interest rate hikes have affected households thus far. Overall, the revised forecasts and economic challenges pose concerns for Australia’s economy, with households adjusting their spending and the RBA considering further rate hikes in the future.
