Economic growth will continue to slow throughout 2023 under the impact of rising interest rates aimed at curbing inflation but Australia can avoid recession, according to CBA economic analysis released with the bank’s half year results presentation.
Growth in gross domestic product (GDP) is forecast by CBA to come in at 1.1% this calendar year, significantly lower than the 5.2% in 2021 and 3.6% last year when the country began emerging from the economic and social impacts of the Covid-19 pandemic.
The Reserve Bank of Australia, which has lifted interest rates significantly since May 2022 to combat inflation, expects GDP growth to be slightly higher than CBA’s forecasts at 2.25%.
Australia experienced its first recession in three decades in 2020 when the economy contracted by 1.8% as a consequence of the first year of the pandemic. Since then, economic growth has rebounded on the back of monetary and fiscal stimulus and the easing of restrictions, prompting a strong recovery in consumer spending and business investment.
But the return of inflation caused by a combination of global and domestic factors including supply chain pressures, higher energy and food prices and a tight labour market has led the Reserve Bank to raise interest rates sharply over the past nine months from 0.1% to 3.35% now.
While the latest bout of inflation is thought to have peaked at 7.8% in the December 2022 quarter, the on-going effects of the price rises are not expected to dissipate until the end of this year and only start to return to the RBA’s target range of 2% -3% in 2024, according to CBA’s forecasts.
To achieve that, the RBA last week flagged that the official cash rate will have to go up further. CBA now expects the central bank will increase interest rates to 3.85% with rises of 0.25% in March and April respectively before pausing to see what the full impact has on household and business consumption.
With consumer sentiment falling, house prices to continue to weaken and the first signs of a spending slowdown emerging, CBA’s economists are expecting that interest rates will have to be cut by the RBA in the fourth quarter of this calendar year to help avoid the prospect of a recession — what is commonly known as a “hard landing” for the economy.
On the plus side, however, current and future growth will continue to be underpinned by low levels of unemployment, low under-employment and high participation rates while exports and non-mining investment continue to hold up well. The pressures of a tight labour market should also be eased with a swifter return in net overseas migration.
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FAQs
“We expect strong population growth will ensure that Australia stays out of recession,” he said. “But policymakers will need to walk a fine line to ensure cost-of-living pressures do not overwhelm vulnerable households, inflation returns to target in a timely fashion, and the labour market remains close to capacity.”
What is the CBA economic forecast for Australia? ›
The updated economic forecasts show a downward revision to the growth outlook for 2024 compared to previous projections released in November 2023. The RBA now expects a real GDP growth of 1.3% in June 2024 (down from 1.8%) and 1.8% by December 2024 (versus 2% previously).
Why is Australia's economic growth slowing? ›
Australians were buying less from overseas and businesses likewise were not bringing in items to sell. The figures reveal that the impact of the Reserve Bank raising the cash rate by 425 basis points is causing a sharp slowing of the economy.
Is Australia technically in a recession? ›
While its not in a technical recession, Australia did fall into a per capita recession in 2023 | news.com.au — Australia's leading news site.
Is Australia at risk of a recession? ›
Will Australia go into a recession? As for the likelihood that Australia might also be headed for a recession, Oliver puts the likelihood at 40 per cent. "There's been an ongoing debate here about whether we'll see a recession or not," he explained.
How likely is Australia to go into recession? ›
Australia recession risk: Experts say Australia at 1-in-3 risk of hitting recession in 2024, according to Finder RBA survey.
What is Australia's biggest economic problem? ›
Its underappreciated how big a problem it is for the Australian economy. ABS surveys consistently report supply chain disruptions as the top challenge facing businesses – worse than labour shortages or financial difficulties.
Will Australia go into a recession in 2024? ›
A survey found 70% anticipated a recession within 12 months. But the government and banking sector generally believe we'll avoid a recession. The prediction for 2024 is below trend but still positive: economic growth and an RBA rate-cutting cycle will start in late 2024 as inflation starts easing.
What is the current state of the Australian economy? ›
Australian economy grew 0.2% in the December quarter 2023
Gross domestic product (GDP) rose 0.2%, driven by government expenditure and private business investment.
Why is Australia's economy so strong? ›
Australia has plentiful supplies of natural resources, including the second largest accessible reserves of iron ore in the world, the fifth largest reserves of coal and significant gas resources. For a long time, commodities have made up a sizeable share of our exports.
The latest GDP figures show that the Reserve Bank has slowed things down so drastically that Australia's economy, for the first time for 40 years, has gone an entire year where it grew only because of population increases.
Is Japan still in a recession? ›
Japan's economy has narrowly avoided recession, underscoring the economic challenges facing the East Asian giant even as its stock market is cruising at its highest levels in decades.
Why is Australia's economy stable? ›
Australia has plentiful supplies of natural resources, including the second largest accessible reserves of iron ore in the world, the fifth largest reserves of coal and significant gas resources. For a long time, commodities have made up a sizeable share of our exports.
Does Australia have a stable economy? ›
Australia is a strong and stable economy with a positive outlook for growth. We've been growing for the past 30 years at an impressive average rate of 3.1%, above the 2.1% average for advanced economies (International Monetary Fund, 2023, World Economic Outlook, April 2023 database).
What happens to house prices in a recession in Australia? ›
A recession doesn't mean Australian house prices crash. They can even rise in a downturn. Prices are more likely to drop when it's harder to get a home loan.
How to prepare for a recession in Australia? ›
What happens in a recession?
- Take stock of your financial priorities. ...
- Focus on debt repayment if you're able. ...
- Consider your career opportunities, both now and in the future. ...
- Try to bolster your emergency fund ahead of time. ...
- Make an effort to stay on top of your financial situation.
