Reserve Bank wary of cautious consumers amid falling house prices as global economy sours

The Reserve Bank has lowered its forecasts for economic growth as interest rate hikes, falling house prices and an acidifying global economy weigh on Australia’s prospects.

The bank has slashed its projections for household consumption, which accounts for about 60 percent of the Australian economy.

“Higher consumer prices, rising interest rates and falling house prices are expected to weigh on private spending growth, at the same time as public demand growth slows,” the bank noted in its latest monetary policy statement.

The bank cut its consumption forecast for the middle of next year from 4.4 percent to 2.8 percent, following the results of surveys showing consumer confidence approaching recessionary levels.

Higher interest rates are expected to be a major factor behind the tightened belts, with the RBA basing its forecasts on the assumption that cash interest rates would reach 3 percent by the end of the year — up from 1.85 percent currently — before hitting a bit towards the end of 2024.

It is important to note that this is not an RBA forecast for the spot interest rate, but an assumption based on market prices and economists’ forecasts.

Australia’s gross domestic product (GDP) outlook has been cut by a full percentage point from about 4.2 percent for December 2022 to 3.2 percent.

Those cuts will continue for the remainder of the forecast period, with the economy expected to grow at just 1.75 percent over the next two years.

Falling house prices, coupled with the previous construction boom, inspired by ultra-low interest rates and the previous government subsidy to HomeBuilder, will cause housing investment to fall sharply (-4.8 percent) in 2024.

State and federal governments are also not expected to provide aid, with government spending expected to contract next year.

Real wages continue to shrink

Despite the slowdown in GDP growth, the RBA expects the job market to remain strong.

It now forecasts that unemployment will hit a low of about 3.25 percent later this year, before gradually declining to 4 percent by the end of 2024, as economic growth slows and migratory flows begin to ease some labor shortages.

Despite leading to a modest rise in wage growth to about 3.5 percent next year, the Reserve Bank still expects real wages to fall for at least the next year – that is, prices will continue to rise faster than the salary packages.

After peaking at 7.75 percent by the end of this year, inflation is expected to still be around 6.2 percent by mid-next year and at 4.3 percent by the end of 2023.

A major reason for this will be further pain for electricity and gas users.

“Contacts within the bank’s liaison program generally expect further significant increases in retail electricity prices in 2023,” the RBA noted.

“This is largely because the recently announced regulated price increases for 2022 were decided before the final run-up of wholesale prices and because wholesale prices are expected to remain high.”

Consumers can also expect more manufacturers and retailers to pass on the higher cost of their inputs in retail prices.

“A significant portion of the companies in the bank’s liaison program have increased prices or expect to do so in the coming months as a result of past increases in input costs,” the report said.

“Some upstream cost pressures are showing signs of easing, but it will take time to affect prices paid by consumers.”

Risks ‘skewed downwards’

But even those downgraded forecasts remain vulnerable to a weaker global economy.

The IMF recently lowered its global economic forecasts, while the Bank of England overnight warned of a prolonged recession in the UK, even as it raised interest rates there by half a percentage point.

“Risks to the global outlook are on the downside,” the RBA warned.

“The synchronized nature of monetary policy tightening globally could be quite contracting, and is happening at a time when fiscal policy is less supportive.”

Closer to home, the Reserve Bank is eyeing Australia’s largest trading partner, where economic growth has virtually ground to a halt in recent months.

“Restrictions to contain the spread of COVID-19 in China led to an unexpectedly large contraction there in the June quarter; further outbreaks could both dampen growth in China and disrupt global supply chains,” the bank warned.

“The Chinese economy is also struggling with weak real estate market conditions and growing unrest among developers.”

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