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After factoring in population growth, economic activity in two years will be at 2021 levels, says the latest Deloitte Access Economics forecast.
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Australia faces ‘deep per capita recession’: Deloitte
21 July 2023
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11 minute read
Prosperity has stalled and Australia faces “a deep per capita recession” over the next two years, according to the latest Deloitte Access Economics forecast.
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It said the sequence of “unexpected” rate rises by the RBA meant economic growth would slow to 0.9 per cent for FY23-24, well below the bank’s forecast of 1.5 per cent and a fraction of the 10-year average of 2.4 per cent.
“Surprising resilience in the global economy has allayed immediate concerns about a global recession,” the report said. “Despite this, the broad narrative remains largely unchanged – global economic growth is still likely to be significantly slower in 2023 than in the previous calendar year as tighter monetary policy continues to hinder activity.
“Meanwhile, the outlook for the Australian economy has softened further. The RBA has increased interest rates by more than previously expected and
Deloitte Access Economics forecasts the Australian economy to grow by just 0.9 per cent in the 2023-24 financial year.
“For comparison, the economy grew at an average annual rate of 2.4 per cent over the previous the decade, and 2.6 per cent in the decade before the pandemic.”
Deloitte Access Economics partner and report lead author Stephen Smith said the outlook was much worse after removing the effect of population growth.
“A deep per capita recession is expected over the next two years,” he said. “In 2025, economic activity per person in Australia is expected to be around the same as in 2021, indicating that prosperity has stalled.”
“While the RBA paused in July, the full effect of the 400 basis points of interest rate increases to date is yet to be seen.
“Deloitte Access Economics remains concerned that too much has already been done by the RBA given that most of the inflation in the system stems from supply side issues – a fact confirmed in recent research by the RBA itself – and is therefore largely immune from monetary policy. At the same time, flagging productivity and soft business investment are a reminder of broader challenges facing the Australian economy.”
Deloitte said the prime drivers of supply-side inflation – such as shipping costs and import prices, a disorderly energy transition or higher rents and house prices – could not be readily solved by higher interest rates.
It said that economic evidence was accumulating that monetary policy had already been tightened too much – something Deloitte had been warning about for months.
“The pace of inflation has peaked and is moderating, wage growth is not excessive and medium-term inflation expectations are not rising,” Smith said. “In that context, the RBA was right to pause at its meeting in early July and
wait for more information about the effect of previous increases in interest rates.
“It was notable, however, that outgoing Governor Lowe dropped a reference to keeping the economy on an ‘even keel’ in his statement announcing the July monetary policy decision, despite those words appearing in each of the
10 preceding statements dating back to August 2022.
“Instead, the July statement said the RBA board ‘is still expecting the economy to grow’. That’s a considerably lower bar.
“The current disinflation impulse reverberating through developed economies is neither a surprise nor likely to be short-lived, and will flow through to lower headline inflation in Australia over coming quarters.”
It said imports had gone from being a major source of inflation to a key driver of disinflation, with prices of imported consumer goods dropping 2.4 per cent in the March quarter and the cost of imported intermediate inputs falling 6 per cent, “which should flow through to softer prices faced by Australian consumers in subsequent periods”.
However, deceleration in one area was offset by acceleration in others, with housing and electricity costs hit by supply shortages.
“For this reason, we remain of the view that rising housing and utilities costs will lead to a more gradual deceleration in the various measures of underlying inflation in Australia than has been observed in other countries to date.”
Deloitte Access Economics forecasts underlying inflation to average 4.2 per cent in 2023-24 and return to the RBA’s target band of 2-3 per cent in 2024-25 without further increases in the cash rate.
“Overall, the profile for the normalisation of inflation is achievable with the monetary policy decisions already taken. That is, unless circumstances change significantly, the evidence does not support any further increases in the cash
rate target.”
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