Australia’s economy is facing a “sharper, longer slowdown” as the Reserve Bank of Australia is expected to raise interest rates again on Tuesday to contain persistent inflation, according to forecasts from major bank economists.
The anticipated increase would lift the cash rate to its highest level since 2008 and add further pressure to mortgage holders. It comes amid growing concerns that weaker growth, falling house prices and the prolonged conflict in the Middle East could push the economy into recession.
Belinda Allen, head of Australian economics at Commonwealth Bank, said real GDP could grow by just 1% by the middle of next year, down from an earlier forecast of 1.8%. CBA expects growth to reach only 1.1% in 2027.
Allen said she had previously expected signs of an economic recovery by the New Year, but now believed the economy would bottom out “deeper and later”. She attributed the downgrade mainly to oil prices, which have risen well beyond expectations as the Middle East conflict has continued.
Brent crude, the global oil benchmark, has climbed from about $US72 a barrel in early July to above $US110 in recent days. Economists had expected the conflict to ease and prices to return closer to normal, but those expectations have not materialised.
National Australia Bank has also cut its economic forecasts. Gareth Spence, the bank’s head of Australian economics, said unemployment might need to rise further than previously expected to bring inflation under control. He forecast the unemployment rate could increase from 4.7% to as high as 5.4% by the end of next year.
CBA’s forecast is somewhat less severe, with unemployment expected to peak at 5.1% over the same period. Both banks expect economic growth to remain below trend through 2027 and 2028.
The outlook complicates the RBA’s effort to reduce inflation without undoing the employment gains made after the Covid-19 pandemic. Spence said the deteriorating conditions also raised the possibility that the central bank might need to increase rates again.
Australia’s property downturn is adding to the pressure. AMP chief economist Shane Oliver said home prices could fall by as much as 15% before stabilising late next year. Sydney prices have already dropped 10% from their recent peak.
Oliver said a substantial decline in property values could weaken household spending as homeowners feel poorer, creating a so-called wealth effect. A weaker housing market could also reduce homebuilding activity.
An economic contraction is not Oliver’s base case, but he said the risk of recession was “significant and rising”. If the RBA raises rates as expected on Tuesday, he estimated the probability could reach as high as 45%.
Sources: The Guardian World.