The Reserve Bank has slashed its forecasts for economic growth as rate rises, house price falls and a souring global economy weigh on Australia's outlook.
The bank has dramatically scaled back its forecasts for household consumption, which accounts for about 60 per cent of Australia's economy.
"Higher consumer prices, rising interest rates and declining housing prices are expected to weigh on growth in private spending, at the same time as growth in public demand slows," the bank noted in its latest Statement on Monetary Policy.
The bank slashed its consumption forecast for the middle of next year from 4.4 per cent to 2.8 per cent, echoing the results of surveys that show consumer sentiment approaching recessionary levels.
Higher interest rates are expected to be a major factor behind tightened belts, with the RBA basing its forecasts on an assumption that its cash rate would hit 3 per cent by the end of the year – up from 1.85 per cent currently – before falling back a little by the end of 2024.
It is important to note that this is not an RBA forecast for the cash rate, but an assumption based on market pricing and economist forecasts.
The outlook for Australia's gross domestic product (GDP) has been cut by a full percentage point from around 4.2 per cent for December 2022 to 3.2 per cent.
Those cuts continue for the rest of the forecasting period, with the economy expected to grow just 1.75 per cent for the next two years.
Falling house prices, combined with the previous construction boom inspired by ultra-low interest rates and the previous government's HomeBuilder grant, will result in dwelling investment falling sharply (-4.8 per cent) over 2024.
State and federal governments are also not expected to provide any assistance, with expectations that public spending will shrink next year.
Real wages to keep shrinking
Despite the slowdown in GDP growth, the RBA expects the jobs market to remain strong.
It is now predicting that unemployment will bottom out at about 3.25 per cent later this year before gradually creeping back up to 4 per cent by the end of 2024, as economic growth slows and migration flows start to ease some labour shortages.
Despite this leading to a modest pick-up in wage rises to about 3.5 per cent next year, the Reserve Bank still expects real wages to fall for at least the next year – that is, prices will keep rising faster than pay packets.
After peaking at 7.75 per cent by the end of this year, inflation is still expected to be about 6.2 per cent by the middle of next year, and 4.3 per cent at the end of 2023.
A key reason for this will be further pain for electricity and gas users.
"Contacts within the bank's liaison program generally expect further significant increases in retail electricity prices in 2023," the RBA observed.
"This is largely because the recently announced regulated price increases for 2022 were decided before the latest run-up in wholesale prices and because wholesale prices are expected to remain elevated."
Consumers can also expect to see more manufacturers and retailers passing the increased cost of their inputs on in retail prices.
"A significant share of firms in the bank's liaison program have increased prices or expect to do so over the coming months as a result of earlier increases in input costs," the report noted.
"Some upstream cost pressures are showing signs of easing but it will take some time before this affects prices paid by consumers."
Risks 'skewed to the downside'
However, even those downgraded forecasts remain vulnerable to a weaker global economy.
The IMF recently slashed its global economic forecasts, while the Bank of England overnight warned of a long recession in the UK even as it raised interest rates there by half a percentage point.
"The risks to the global outlook are skewed to the downside," the RBA warned.
"The synchronised nature of the tightening in monetary policy globally could prove quite contractionary, and is occurring at a time when fiscal policy is offering less support."
Closer to home, the Reserve Bank has an eye on Australia's biggest trading partner, where economic growth has virtually ground to a halt in recent months.
"Restrictions to control the spread of COVID-19 in China led to an unexpectedly large contraction there in the June quarter; further outbreaks could both weigh on growth in China and disrupt global supply chains," the bank cautioned.
"The Chinese economy is also contending with weak property market conditions and increasing levels of distress among developers."
