Australia's central bank is gearing up for its fifth interest rate hike on Tuesday. This move is likely to hit mortgage holders hard. The Reserve Bank of Australia (RBA) is dealing with persistent inflationary pressures, and economists are warning of a 'sharper, longer slowdown' for the nation's economy. It's a tough situation.
With conflict intensifying in the Middle East and housing prices taking a nosedive, the RBA's expected decision will push the cash rate to its highest level since 2008. These factors have sparked concerns that the Australian economy might be teetering on the edge of recession.
Belinda Allen, who heads Australian economics at CBA, predicts that real GDP will shrink to just 1% by the middle of next year. This is down from the previous forecast of 1.8%. She says the unexpected surge in oil prices, driven by the ongoing Middle East conflict, is behind this more pessimistic outlook. Brent crude, a global oil price benchmark, has jumped from about $72 a barrel in early July to over $110 recently.
Allen initially expected signs of economic recovery by the New Year. But now she foresees the economy 'bottoming deeper and later'. She expressed disappointment that hopes for resolving the Middle East conflict and normalizing oil prices have not materialized.
Adding to the gloomy forecast, Gareth Spence, head of Australian economics at NAB, indicated that unemployment might need to rise more than previously thought to control inflation. Spence echoed the RBA's recent sentiments, projecting that the jobless rate could increase from 4.7% to as high as 5.4% by the end of next year. In contrast, CBA's forecast is slightly more optimistic, predicting a peak unemployment rate of 5.1%.
Spence emphasized that the RBA's strategy to tame inflation without sacrificing post-COVID employment gains seems increasingly unlikely. He also noted the possibility of further rate hikes. Union leaders protested against the anticipated increase outside the RBA's Sydney offices on Monday morning.
Housing Market and Economic Risks
The economic outlook is further clouded by Australia's property market slump. It's on track to be one of the deepest on record. Shane Oliver, AMP's chief economist, suggests that home prices could fall by as much as 15% before stabilizing late next year. Sydney property values have already dropped by 10% from their recent peak.
Oliver highlighted the potential economic impact of a significant property correction, citing RBA research. A downturn of this magnitude could lead to a substantial reduction in consumer spending, known as the 'wealth effect', as homeowners become more cautious with their finances.
The weakening property market is also expected to affect homebuilding, adding to the economic pressures. Although Oliver does not consider an economic contraction his 'base case', he warns of a 'significant and rising' risk of recession. Should the RBA proceed with the expected rate hike, he estimates the chance of a recession could rise to as high as 45%.
As Australia braces for the upcoming rate hike, the mix of global and domestic challenges underscores the delicate balance the RBA must maintain to steer the economy through turbulent times.
