National Australia Bank has delivered a sobering assessment of how it expects the economy to perform this year.
Key points:
- NAB is expecting economic growth to slow to 0.7 per cent over 2023 and 0.9 per cent in 2024
- With some quarters forecast at just 0.1 per cent growth, Australia risks a recession
- The construction sector is likely to hold up until its pipeline of existing work runs out at the end of this year
“Looking forward, we see growth slowing sharply as consumer spending comes under pressure from both higher rates and inflation,” NAB chief economist Alan Oster said.
The Reserve Bank has responded to soaring inflation by undertaking one of the most-aggressive interest rate hiking cycles in its history.
Economists warn households will need to absorb a period of both high inflation and rising interest rates, until inflation eventually subsides.
During this time consumer demand — which accounts for the majority of gross domestic product or GDP — is expected to slow abruptly.
The National Australia Bank’s economics team now has the Australian economy coming to a virtual standstill by mid-year.
“On GDP, we see the quarterly rate of growth slowing to around 0.1 per cent in mid-to-late 2023,” the team noted.
A recession is commonly defined as two consecutive quarters of negative economic growth, so a forecast of quarterly growth of just 0.1 per cent for the back half of this year indicates that NAB sees a reasonable risk of an economic contraction before year’s end.
Over the calendar year, the NAB sees Australia’s economy muddling along before demand picks up a little next year.
“That sees through the year growth slow to just 0.7 per cent in 2023 and 0.9 per cent in 2024 before around trend growth of 2.2 per cent in 2025.”
That relies though, in the NAB’s view, on the Reserve Bank easing monetary policy, or cutting interest rates, early next year.
“We recently revised up our outlook for the cash rate in the near-term and now expect it to peak at 4.1 per cent in May 2023 and stay there until the RBA begins cutting in early 2024.”
Construction work pipeline to run dry
Many sectors of the economy are keen to see cheaper borrowing costs return, to help improve their bottom lines.
The construction sector is one example.
The Housing Industry Association released a statement today warning the sector is under enormous pressure.
“Lending for the purchase or construction of a new home had already fallen to its lowest level since 2012 by the end of 2022, and the full impact of last year’s rate increases is still to flow through to households,” HIA Chief Economist, Tim Reardon said.
“This will see the number of detached housing starts fall below 100,000 starts per year for the first time in a decade, to just 96,300 in 2024.
“This is a very rapid slowdown from the 149,000 starts in 2021.”
NAB forecasts little good news for this sector, with a further 11 per cent decline in property prices pencilled into its forecasts for this year, after prices dropped 9 per cent last year on CoreLogic’s index.
“Consistent with historical episodes of price declines and rate rises, activity in the housing market has fallen sharply,” its economists wrote.
“That said, while approvals have fallen, the pipeline of outstanding work remains elevated.
“This pipeline of work is likely to support construction activity in the near term as supply constraints ease but we expect dwelling investment to slow in the second half of 2023 and drag on activity in 2024 as the flow of new approvals is unable to offset relatively high rates of work done.
“At current rates of work done, there are around three to four quarters of outstanding work to be completed.”
RBA debated super-sized rate rise in February
According to the minutes from the RBA’s February meeting, the financial stress on sectors like this may only intensify.
The RBA today released the minutes from its February board meeting that determined the current interest rate settings in the economy.
RBA’s minutes indicate its considered a super-sized 0.5 percentage point (50-basis-point) increase in the cash rate.
“The board considered two options for its policy decision: a 50-basis-point increase, and a 25-basis-point increase,” RBA February meeting minutes noted.
“The arguments for a 50-basis-point increase stemmed from the concern that there had been a pattern of incoming prices and wages data exceeding expectations, and a risk that high inflation would be persistent.
“The arguments for a 25-basis-point increase also recognised the need to bring demand and supply in the economy more into balance, but noted that inflation was expected to have reached its peak, that the outlook was for a softening in consumption growth, and that there were many uncertainties around the outlook.”
Per capita recession very likely
Key to the National Australia Bank’s outlook is how the consumer responds to already delivered and ongoing interest rate increases from the Reserve Bank, of which at least two more are now expected.
“The key macro dynamics this year will be how households respond to higher interest rates, how quickly inflation moderates and, relatedly, how labour market dynamics flow through to wage growth,” NAB noted.
“Population growth is also elevated at present and will likely continue to support to activity.”
While an increase in the population may boost GDP growth — in volume terms — based on the NAB’s forecasts today, Australians can expect a sizeable per capita recession in 2023, where output, and living standards, per person contract significantly.
Impact Economics lead economist Angela Jackson argues the RBA is risking a technical recession with any further interest rate increases, notwithstanding the effects of population growth.
“There remains positive signs for the economy, including the return of international students that will alleviate key labour shortages, however the outlook is very weak and points to higher unemployment,” she said.
“The RBA will need to leave rates and allow the inflation rate to come back within range for over a year for these forecasts to hold.
“The million dollar question is will it have the nerve to do that, or will it continue to hike rates in response to an inflation rate above target and thereby increase the already real risk of a recession.”
Official wages data will be released tomorrow morning at 11:30am AEDT, providing the latest piece in the economic data jigsaw that the RBA will try and piece together to decide its next moves.