‘Per-capita recession’ tipped as banks slash economic growth forecasts
By Rachel Clun
Australia’s four largest banks have downgraded their growth forecasts for the economy for the year ahead as households pull back on spending in response to aggressive interest rate rises, while the treasurer claims the country is in good stead to face economic challenges thanks to strong employment.
Following strong jobs growth in May and a surprise interest rate rise earlier this month, Westpac, NAB, Commonwealth and ANZ have downgraded their forecasts for economic growth for 2023 and 2024, and both Westpac and ANZ economists believe a per-capita recession – two quarters of negative growth in gross domestic product per person – is likely in the next year.
Interest rates have eaten into consumer spending and more rate rises are expected in July and August.Credit: Steven Siewert
The weaker forecasts come just weeks after the Reserve Bank painted a rosier picture of economic growth, forecasting gross domestic product would lift by 1.2 per cent in 2023 and 1.7 per cent in 2024 in its Statement on Monetary Policy in May, and after Treasury’s forecast of 1.75 per cent growth this year in the May budget.
Since then, the Reserve Bank board has lifted interest rates by another 0.25 percentage points to 4.1 per cent in June – the 12th rate rise in just over a year – and governor Philip Lowe warned more rate rises were a possibility as the bank tries to bring down high inflation.
The rate rises have been eating into consumer spending, national economic data from the Australian Bureau of Statistics showed earlier this month, as households cut back on non-essentials to help pay higher interest bills.
As a result, Westpac now expects the economy to grow by just 0.6 per cent over 2023 and 1 per cent in 2024, the bank’s chief economist Bill Evans said. “The key driver of this insipid growth outlook is household consumption, which we now expect to grow by just 0.3 per cent in 2023 and 0.6 per cent in 2024,” he said.
Given high inflation – which was 6.8 per cent as of April – and soaring interest rates, Evans said household spending would be even worse if it was not for the large savings buffers people built over the pandemic, coupled with a strong jobs market.
“The tightest labour market conditions in 50 years and still elevated job vacancies are providing clear support to household incomes and spending, but also give those households coming under more intense financial pressure more scope to make adjustments,” he said.
According to Treasury analysis, 465,000 jobs were created between May 2022 and May 2023, the strongest employment growth of major advanced economies.
Treasurer Jim Chalmers said the figures were a remarkable achievement given the economic uncertainty ahead.
Treasurer Jim Chalmers says the strong jobs market will help Australia weather tough economic conditions.Credit: Louise Kennerley
“More Australians are in work than ever before, the participation rate is higher than ever before and the share of women in work is higher than ever before,” he said.
“While we know slowing global growth, high inflation and higher interest rates will impact our economy and labour market over the coming 12 months, Australia is in a better position than nearly any other country to face the challenges ahead.”
The government has been under political pressure to address the worsening economic outlook. The Greens have repeatedly urged the treasurer to overrule the RBA’s rate rise decisions, while the Coalition says the government needs to boost productivity.
Shadow treasurer Angus Taylor said Australia came out of the pandemic in a strong economic position but under the Labor government that foundation was weakening.
“Labor’s plan is failing to fight inflation, failing on productivity and failing on economic growth. Labor’s only plan is to make Australians poorer,” he said.
The unemployment rate fell 0.1 percentage points to 3.6 per cent in May after an additional 76,000 people gained work that month, giving the RBA more reason to continue raising interest rates. ANZ economists have downgraded their forecast for economic growth as a result.
ANZ expects the RBA to lift the cash rate by 0.25 percentage points in both July and August, taking it to a near-12-year high, given the surprisingly strong employment figures.
“We expect GDP to grow just 1 per cent in 2023 and 1.3 per cent in 2024, with per-capita GDP likely to decline until the second half of 2024,” it said.
Westpac expects the unemployment rate to rise to the pre-pandemic level of 5.3 per cent by the end of next year. Evans said the new forecasts could mean a recession, depending on the definition.
“An increase in the unemployment rate from 3.5 per cent at the beginning of 2023 to 5.3 per cent at the end of 2024 might fit an alternative definition of a recession, although we are unaware of any formal definition,” he said.
“Our forecasts also imply per-capita spending and GDP recessions in 2023 and 2024, which is sometimes used as an alternative-measure definition of recession.”
Commonwealth Bank head of Australian economics Gareth Aird said while May’s labour force data was “unquestionably strong”, there were signs within the figures that the jobs market is cooling, with a 0.3-percentage-point increase in underemployment to 6.4 per cent, its highest level since February last year.
“The message we take from the data is the labour market is loosening. But not via the traditional mechanism of an increase in the unemployment rate. Rather, it is loosening via more workers looking for extra hours,” he said.
Aird also noted that only about half of the RBA’s 4 percentage points of interest rate rises had hit households, meaning there was plenty more to still be felt. “But the [RBA] board might feel the policy response of least regret at this stage is to pull the rate hike trigger again in July,” he said.
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