The Commonwealth Bank of Australia (CBA) on Friday downgraded its economic forecasts following a recent cash rate increase, saying the country has a 50 per cent chance of sliding into recession this year.
“We put the odds of a recession in 2023 at 50 per cent as the lagged impact of the RBA’s rate increases continues to drain the cash flow of households that carry debt,” Gareth Aird, CBA’s head of Australian economics, wrote in the newly issued Economic Insights.
On Tuesday, the Reserve Bank of Australia (RBA) raised the cash rate target by 25 basis points to 4.10 per cent, with Governor Philip Lowe noting that the annual inflation sitting at 7 per cent is “still too high”.
In light of the RBA’s new decision, Aird expected a further 25-basis-point increase for the cash rate to reach 4.35 per cent.
“The risk is a 25bp (basis point) rate hike earlier in July. There is also a risk of 25bp rate rises in both July and August, which would take the cash rate to 4.6 per cent,” Aird said, forecasting the timing of the start of rate cuts will be from the fourth quarter of 2023 to first quarter of 2024.
As Australia is having a “deeply restrictive” monetary policy, the CBA expert held a gloomy view of the future economic growth.
According to the new analysis, the annual gross domestic product (GDP) growth is expected to slow to 0.7 per cent in the fourth quarter.
With annual population growth likely to reach 2 per cent in 2023, Australia is forecast to be in a per-capita recession for the remainder of this year.
Weaker growth may also bring about higher unemployment, as the unemployment rate is estimated to jump to 4.4 per cent by end-2023 and touch 4.7 per cent by mid-2024.
Aird also mentioned that monetary policy works with a lag.
“As the lagged impact of rate rises continues to hit home borrowers, mortgage repayments will rise to a record high as a share of household income. This will have a negative impact on household consumption,” Aird noted.
However, Aird also spoke of some “light at the end of the tunnel”, as he predicted a 125-basis-point easing in interest rates to arrive in early 2024.
“As interest rates are cut, it will free up cash for those borrowers that have a mortgage. And the demand for credit will begin to lift. Momentum will start to pick up and the upward trend in the unemployment rate will wane. Consumer sentiment and spending will lift,” said the expert.
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