Economic growth slowdown forecast as rates rise

23 Jun 2022

The Australian economy is set to grow at a slower pace than previously forecast in 2022 and 2023 as rapid rate hikes to contain inflation impact consumption.

The results of a survey carried out by Bloomberg reveal the A$2.2 trillion economy will grow an annual 3.3% in Q4 and 3.1% in Q1 2023, lower than prior forecasts of 3.8% and 3.6%, respectively. The inflation outlook was increased by a percentage point in both quarters. Bloomberg polled 45 analysts.

“Higher inflation and higher interest rates will weigh on household consumption,” stated the chief economist at National Australia Bank, Alan Oster. He also cited further risks in future “including if rates move into more clearly restrictive territory or if the global economy deteriorates rapidly.”

Earlier this month, the Reserve Bank of Australia announced a half-point rise in the cash rate to take the benchmark rate to 0.85% as the inflation outlook deteriorates. The central bank is predicted to make another similar hike next month, whilst traders are pricing in a 3.4% cash rate by the end of 2022.

After previously forecasting the central bank to be more prudent than market pricing, economists are increasing their forecasts, Bloomberg reports. The cash rate is now predicted to end the year at an average 2.45% from a previous 1.75%, before moving up to 2.6% in Q1.

However, despite the faster rate rises, economists still forecast a soft landing for the economy, in stark contrast with mounting warnings of steep rate hikes by the U.S. Federal Reserve, culminating in a recession.

Moreover, optimism in Australia has been bolstered by around A$200 billion of savings accumulated during the pandemic and a robust jobs market. The poll revealed unemployment is forecast to decline to 3.6% in Q3, from the current 3.9% figure, and then move up again in Q2 next year.

“Ultimately, we still see a ‘soft landing’ for Australia, as households have built up savings to draw on and, importantly, we don’t expect unemployment to rise materially,” Oster added.