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Optimism and anxiety cloud economic hopes and forecasts

Inflation's rise has tailed off in the latest quarter, but there is no certainty what lies ahead.  Photo: TND

Inflation's rise has tailed off in the latest quarter, but there is no certainty what lies ahead. Photo: TND

After paying upwards of $10 for iceberg lettuces and enduring eight interest rate hikes in a row in 2022, households are apprehensive about Australia’s economic prospects in the new year.

The path ahead for inflation is at the centre of economic fortunes domestically and around the world as central banks try to slow their economies gently and avoid a recessionary crash landing.

In Australia, headline inflation came in at 7.3 per cent in the third quarter but a softer 6.9 per cent monthly read in October could be a sign the inflation surge has passed its peak.

Checkout pain

But Treasurer Jim Chalmers warns the indicator is yet to pick up inflated grocery prices caused by the latest round of flooding, nor rising energy prices, which are likely to show up in the final quarter.

If inflation continues to rise, so will interest rates, which deepens the risk of a recession.

While a recession is not expected in Australia – unlike other parts of the world, such as Europe and the US – the nation’s growth is expected to slow to around 1.5 per cent over 2023 and 2024 as per the Reserve Bank’s predictions.

AMP Capital economist Shane Oliver says there’s reason to be optimistic that inflation will taper off fairly rapidly and keep a lid on rate rises, with supply chain pressures easing and signs of labour markets topping out from their extreme peaks.

He said it would likely only take a slight pull-back in labour demand to relieve wages growth pressure and take ballooning pay packets out of the inflationary equation.

But Australia is not out of the woods.

Along with an unclear trajectory for the labour market – underscored by a hot November read – NAB economists say pent-up demand for services also poses a question mark and could complicate matters for the RBA.

Eyes on China and Ukraine

Other uncertainties weighing on Australia’s economic future include China’s rocky emergence from COVID-19, how the war in Ukraine plays out and what road the Federal Reserve takes to manage the US inflation situation.

Locally, ANZ economists point to the government’s efforts to take the edge off energy prices, the transition to a low-carbon economy, the May budget and the review of the RBA as issues to watch.

A sharper-than-expected fall in home prices could also spark financial stability issues as the households fall off the fixed-rate mortgager cliff and unemployment starts to lift.

On the long-awaited pause in interest rate hikes, there’s some disagreement about when that will happen.

Another hike in February is broadly expected, with the case bolstered by robust November jobs figures.

Commonwealth Bank economists expect to see just one more 25 basis point hike, citing the lagging effect of rate hikes as a key reason to hit the brakes and see how the economy responds.

NAB economists see the cash rate peaking at 3.6 per cent in March, and ANZ and Westpac teams anticipate another 75 basis points worth of hikes, taking the cash rate to 3.85 per cent in May.

-AAP

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