A funny thing happened last week when the governor of the Reserve Bank said the board expected a plural number of rate rises to come: people believed it.
Before last week’s Reserve Bank board meeting, the market predicted the cash rate would peak at 3.6%. The day after the market locked in a peak of 3.85%. A week later the peak is now expected to be 4.1%:
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That would be a 400 basis points increase in 14 months – much faster and greater than anything since the rate rises that occurred before the 1990s recession:
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Not surprisingly this expectation of higher interest rates, coupled with general concerns about cost of living, saw consumer confidence this week fall to a level below that of April 2020 when the entire nation was in lockdown:
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Remember April 2020? Back then every shop was shut, sports were cancelled, there was little prospect of a vaccine and Italy was reporting 124,000 cases and 15,300 deaths. It was a bloody scary time.
But right now Australian consumers are less confident than they were then, despite unemployment being at 3.5%.
I am not a huge one for placing too much store in confidence – politicians including Tony Abbott and Joe Hockey suggested before the 2013 election that all that was needed to get the economy moving was to improve consumer confidence.
But cripes. When people are less confident than they were during a global pandemic and lockdown, it’s not great.
If we look at what the Reserve Bank is expecting to occur over the next few years, being on the pessimistic side of life seems rather appropriate.
Last week’s statement on monetary policy contained the RBA’s first outlook for the economy in 2025. The central bank now expects Australia’s economy from December 2023 to June 2025 to grow by no more than 1.8%:
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GDP of course is not everything, but it is quite astonishing just how dire that prediction is.
Were it to occur, it would equal the longest period of Australia’s economy growing by less than 2%.
To survive two years of economic growth that low without actually tipping into a recession would be a pretty astonishing achievement – especially given the RBA notes economists expect “mild contractions in GDP in the United States and euro area, with a somewhat more prolonged recession expected in the United Kingdom”.
I suspect that if those two years of dismal growth do occur, we will be spending a fair bit of time debating whether or not we are actually in a recession.
Not surprisingly the RBA expects the unemployment rate will rise to 4.4%. It also expects inflation to fall, although a bit slower than it did three months ago:
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Conversely, the RBA now expects wages to grow faster than they did three months ago. Setting aside the RBA’s history of poor wage growth prediction, this is good news.
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But even with these stronger wage growth and lower inflation estimates, the RBA still only expects wages to grow faster than inflation by the middle of next year. At that point we will begin the long recovery of real wages.
It is important to remember that wages should grow faster than inflation. This is worth highlighting because we know from past experience that as soon as real wages rise, business groups will complain about increasing labour costs and unions wrecking the economy.
But even if real wages keep growing at the pace the RBA expects they will from 2023 to 2025, it will take until the middle of 2032 for them to get back to the value they were in March 2020:
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And that assumes things go well.
It highlights just how tough a situation we are in at the moment.
The better wage and inflation figures also mean that the RBA expects real household incomes (essentially the nation’s living standards) will recover faster than it expected last November.
But even this prediction suggests it will take three years for household living standards to get back above the pre-collapse peak:
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That is a historically long time for living standards to be lower than they have been in the past. It is even worse than what occurred during the 1990s recession.
Back then it took nine quarters for living standards to recover; now the bank is estimating it will take 12 quarters – a full three years:
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This is the cost of the very hawkish approach on interest rates.
Raising interest rates slows the economy – that is the whole point. The Reserve Bank is predicting the economy is going to slow in a manner not seen since the 90s.
For now it suggests a recession will not occur but, even if this does not happen, you can expect the RBA will need to cut rates in 2024 and 2025 to reverse the damage done by raising them last year and this year.
Let us hope they will be as bold at cutting rates as they have been at raising them.
• Greg Jericho is a Guardian columnist and policy director at the Centre for Future Work
