Did the Reserve Bank’s interest rate hikes put Australia’s economy on a ‘knife-edge’? David Taylor* says a major consulting firm thinks so.
A major consulting firm has criticised the Reserve Bank for increasing interest rates unnecessarily, pushing hundreds of thousands of household budgets deep into the red.
In the March edition of its Business Outlook report, Deloitte Access Economics partner Stephen Smith claims the two quarter-of-a-percentage-point interest rate hikes in February and March were “unnecessary” and leave Australia “facing the weakest rate of economic growth outside of the pandemic since the recession of the early 1990s”.
Deloitte Access Economics’ opinion is that the RBA has put the economy on a “knife-edge” in its interest-rate-hiking cycle and should have paused earlier (rather than in April).
The RBA is fighting inflation with the wrong weapon
The firm has made the frank statement that the Reserve Bank has been trying to fight inflation with a weapon designed to disarm demand or consumer-driven inflation — when the underlying inflationary problem relates to cost pressures faced by businesses.
“Deloitte Access Economics’ view remains that the surge in inflation which began in the March quarter of 2022 was largely (but not solely) a supply-side story, with congestion in global supply chains, higher energy prices and elevated transport costs causing increases in the price of final and intermediate goods being imported into Australia,” Mr Smith reports.
“And so, the Reserve Bank’s pause in April, after 350 basis points (3.5 percentage points) of increases in the cash rate over a 10-month period, was welcome.”
Deloitte Access Economics is saying the Reserve Bank has — and is — pushing ahead with a monetary policy that is taking too much money out of household bank accounts.
It has prompted the consulting firm to further downgrade its forecast for Australia’s economic growth.
“That downgrade is centred on our households, and a ‘consumer recession’ is now forecast in 2023, with household spending expected to finish the year below where it started.”
Is Australia headed for a recession?
To be clear, the consulting firm is not forecasting a recession.
Gross domestic product (GDP) is derived from adding consumer spending, business investment, government spending and the difference between what the country churns out in exports and loses in imports.
A “technical recession” is generally understood to mean two consecutive negative quarters of economic growth (GDP), or six straight months of economic contraction.
Deloitte is forecasting the “consumer” or household element of this equation will be in the red this year.
That is significant because GDP growth is largely driven by consumers increasing their spending.
“At a cash rate of 3.6 per cent, most Australians will be just fine,” Mr Smith writes.
“Many, however, will not.
“In just 10 months, the cost of servicing an average $600,000 mortgage will have risen by more than $14,000 per year once those rate hikes are fully passed through.”
“But that’s just the average, and there are plenty of mortgage holders on either side of those numbers.”
In its latest Financial Stability Review, the Reserve Bank noted that 15 per cent of variable-rate, owner-occupier mortgage holders will be in negative cashflow by the end of 2023 — and that many of these borrowers are already in the position.
“On these numbers, at least 300,000 Australian households may currently be experiencing negative cash flow, with mortgage repayments and essential living expenses together exceeding household disposable income,” Mr Smith reports.
“That should shock all of us.”
The Reserve Bank is walking a ‘very narrow path’ to curb inflation
But one leading economist supports the Reserve Bank’s fervour for taming inflation.
“There is no doubt that the RBA is seeking to walk a very narrow path that on the one hand brings inflation down within the target range, and on the other avoids a recession,” Impact Economics and Policy lead economist Angela Jackson says.
“The current approach the RBA is taking to wait for more information on the impact of the rate rises to date is the right one, and will increase the likelihood of Australia traversing that narrow path.
“Some form of slowdown after the post-pandemic boom is to be expected, and consumers could not be expected to maintain the level of spending increases seen since the economy reopened — interest rate rises or not.”
“And of course, the RBA is very much aiming to slow down consumption, to take the pressure off inflation. In many ways, failure could be seen if this did not occur and inflationary pressures were allowed to persist.”
Australia faces economic crises on multiple fronts
Alongside the cost-of-living crisis is a housing crisis.
The consulting firm has also taken aim at all levels of government for not providing enough housing, and does not see any end in sight to the financial stress facing renters and potential first home buyers.
“In short, we are building far too few dwellings and, with a myriad of supply side challenges unresolved, that is unlikely to change in the near term,” Mr Smith writes.
It’s a bleak picture Deloitte paints focusing on overwhelming cost-of-living pressures for hundreds of thousands of Australian households, a housing crisis that may worsen before it eases, and the ever-present threat of a global economic shock that would hurt Australia’s economy.
“With households hurting, dwelling construction in the doldrums and the global environment shaky, Deloitte Access Economics has revised down expectations for Australian economic growth in calendar year 2023 and 2024 to just 1.5 per cent and 1.2 per cent respectively.”
“If realised, Australia’s growth will be the slowest outside the COVID-19 pandemic since the recession of the early 1990s,” the Business Outlook report notes.
Of the states and territories, the Northern Territory is expected to experience recession conditions next financial year as declining exports detract from growth.
Most states are expected to grow their economies but only by a modest 1 per cent over the financial year 2023-24 which could easily include some quarters of economic contraction.
*David Taylor is a reporter for the ABC’s flagship current affairs program, The Drum.
This article first appeared at abc.net.au