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The RBA should press pause as the consumer-led recovery is ‘running out of road’.
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One more rate rise could tip us into recession, says Deloitte
23 January 2023
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10 minute read
An “Everest of evidence” weighs against the RBA making any more rate raises as Australia stands on the precipice of a recession, according to the latest Deloitte Access Business Outlook.
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It says one more rate rise would tip Australia over the edge with the consumer-led recovery “rapidly running out of road”.
“In our view, any further increases in the cash rate beyond the current 3.1 per cent could unnecessarily tip Australia into recession in 2023,” said the report lead author Stephen Smith.
“On the RBA’s own figuring, mortgage repayments, including principal and interest, are already on track to rise to a record high as a share of household disposable income over coming months.
“At the same time, real household disposable income per capita – a key measure of prosperity – is falling, and will finish the current financial year at levels last seen before the onset of the pandemic. There is no doubt that Australian households are starting to hurt.”
He said last year’s economic rebound was driven by consumer spending but the brakes were now on.
“The strength of the consumer in rebounding out of the pandemic lockdowns and back into shopping centres was an important reason why Australia’s economy has grown at pace over the last 12 months,” he said.
“Unfortunately, it’s also an important reason why Australian economic growth is expected to slow dramatically throughout 2023.
“Australia’s consumer-led recovery is rapidly running out of road, with the combination of falling house prices, rising interest rates, high inflation, low levels of consumer confidence and negative real wage growth expected to combine to see spending growth decelerate markedly over coming months.”
According to the report, the total volume of consumer spending is expected to fall over the next six months, even as higher prices lift the value of spending.
“That outcome shouldn’t be a surprise given Australia is still only part-way through one of the most significant declines in real household disposable income per capita on record,” Smith said.
Deloitte Access Economics now expected economic growth of just 1.7 per cent in 2023, down from 3.6 per cent last year.
The retail industry had done well following the relaxation of pandemic restrictions but its future looked grim, Mr Smith said.
“The outlook for retailers is far less rosy as cost of living pressures hit households. The finance and insurance industry is also expected to see more modest near term growth as the industry adjusts to a higher interest rate environment.”
But the consumer-led slowdown would play out differently across the country, with the larger consumption and housing-dominated states most vulnerable to higher interest rates.
Mr Smith said the RBA had stumbled over the past two years and should have learned its lesson.
“Financial market participants were burned by the RBA in late 2021. Homebuyers were burned in 2022. This trend need not continue into 2023. “Might official interest rates increase from here? Yes, they might – inflation is well above the target band and the RBA is an institution under pressure.
“Some may feel that a hawkish, inflation-fighting flex is a means for the RBA to heal some of the recent self-inflicted scarring of its reputation. That would be a mistake.
“Combined, there is an Everest of evidence to suggest interest rates should stay on hold from here. Will that evidence be enough? Australians are indeed at the mercy of the RBA in 2023.”
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