‘Per capita recession’: Banks forecast longer downturn as more interest rate rises loom

Australians face a per capita recession for years, and even a brief contraction in early 2024, as RBA minutes reveal central bankers are still fearful inflation will remain stubbornly high.

Westpac chief economist Bill Evans said on Tuesday that a population-adjusted downturn is slated for 2023 and 2024, as higher interest rates slam the brakes on spending growth.

The bank has predicted two more mortgage bill hikes in July and August would take the official cash rate target to 4.6 per cent, echoing NAB and Commonwealth Bank forecasts.

“Given we have a much higher peak for the cash rate, we have to reassess our growth forecasts,” Mr Evans said.

“The key driver of this weakness is the consumer.

“We have a per capita recession in both 2023 and 2024 … we’re expecting you will see negative [GDP] growth in the first quarter of next year.”

RBA stokes fresh interest rates fear

The latest gloomy forecasts came as Reserve Bank meeting minutes for June revealed central bankers decided to push through a hike due to  fears that inflation isn’t falling fast enough.

The move, which surprised many experts, added another $78 to monthly repayments on a typical $500,000, 25-year home loan and threw thousands more families into mortgage stress.

The RBA considered pausing in June, but ultimately decided that stubbornly high price growth for services and a growing risk that wages growth will feed into prices merited a 12th rate hike.

“The recent data suggested that inflation risks had shifted somewhat to the upside,” RBA board minutes published on Tuesday morning stated.

“Given this shift and the already drawn-out return of inflation to target, the board judged that a further increase in interest rates is warranted.”

ANZ Bank senior economist Adelaide Timbrell said the minutes were notably missing a usual reference to the possibility of further rate hikes, though she still expects another in July.

“We still think another increase in July is the most likely outcome given May’s very strong labour market data, which came out after the meeting,” Ms Timbrell said.

Ominous signs for economy

The prospect of more rate hikes is ominous for many Australians, with data this week showing those who bought houses in the past two years are being squeezed hardest as mortgage bills skyrocket.

Thousands more will be thrown into mortgage stress if rates rise again, Roy Morgan estimates.

But that isn’t the only risk facing the economy should the RBA pull the trigger again in July.

Mr Evans said the risk of an economic downturn in Australia is rising and is now forecast on a population-adjusted basis in both 2023 and 2024.

As explained by TND previously, an outright (or ‘technical’) recession is still unlikely because population growth has taken off post-COVID.

Westpac is, however, forecasting a single quarter of negative growth in 2023 in what Mr Evans said will be a cumulation of interest rate pressures weighing on households across Australia.

“The accumulation of all these fixed rates moving onto floating rates [and] the effect of the RBA rate hikes [are] really starting to impact upon the household sector,” Mr Evans said.

Such a reality also implies job losses, with the unemployment rate set to rise over the next year as the economy slows, though the RBA is doing what it can to preserve pandemic job gains.

RBA deputy governor Michele Bullock said in a speech on Tuesday that the RBA is forecasting a return to target inflation by mid-2025, which is far slower than central banks in other countries.

“A faster return to target would likely mean more job losses in the short term,” Ms Bullock said.

“Our judgment is that we can return inflation to target in a reasonable time frame while preserving as many of the employment gains as we can.”

Ms Bullock went on to say that the historically low jobless rate of 3.6 per cent isn’t consistent with inflation returning to target.

The RBA forecasts unemployment rising to 4.5 per cent by late 2024, but under that scenario employment would continue growing in absolute terms rather than going backwards.

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