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RBA's dim forecast for the Aussie economy

The Aussie economy could be in for a tough couple of years.

Pedestrians crossing a busy street, with an inset of RBA governor Philip Lowe.
Like all updated economic forecasts from the RBA, there is a strong probability they will be wrong. (Source: Getty)

The outlook for the economy is fragile, with the balance of risks evenly poised between breaking to the downside and recession, or skating through and recovering in late 2024 or 2025.

At least that’s the picture the Reserve Bank (RBA) is painting in its latest Quarterly Statement on Monetary Policy.

Also by the Kouk:

Weak economic conditions, rising unemployment, wages growth turning lower and inflation - obviously and inevitably in these circumstances - falling back to the target are the conditions the RBA is forecasting over the next 12-24 months.

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In terms of bottom-line GDP growth, the RBA is forecasting a rise of just 0.9 per cent through to the end of 2023, with only a tepid recovery to 1.6 per cent growth in the year ending 2024. This is weak, noting that, with the current population growth, the Australian economy should grow by around 2.75 to 3 per cent per annum to keep the unemployment rate from rising and inflation low and stable.

At one level, the economic slowdown was necessary - and inevitable with the tightening in policy seen over the past 18 months. At another, the gloomy outlook will mean many small and medium businesses will be under financial pressure, the rising unemployment rate will see the ranks of the unemployed increasing by around 150,000 people and the feel of the economy will, for many, be uncomfortable.

Like all updated forecasts from the RBA, there is a strong probability they will be wrong. The big question: in which direction?

If the outcomes err on the downside - perhaps driven by an unexpected decline in global growth, a sharper-than-expected fall in commodity prices or because of weaker domestic conditions under the weight of tight economic policy - the unemployment rate will be higher than currently forecast and inflation will be lower.

There is little margin for error in the RBA’s strategy to squeeze inflation out of the system.

As it stands, the implied quarterly GDP growth profile of the remainder of 2023 is for growth of just 0.2 per cent over each of the next three quarters. Given that population growth is running at 0.4 per cent per quarter, it means a ‘per-capita recession’ with output per person going backwards for a full year.

If population growth remains at that pace into 2024, the 1.6 per cent GDP growth forecast for that year implies zero per-capita growth for a second year.

If the economy underperforms even these quite-pessimistic growth forecasts, it will be in for a tough two years.

It is little wonder consumer sentiment remains deeply negative, notwithstanding steady interest rates for the past two months, the persistence of low unemployment and the rise in wages growth. Consumers are alert to the risks to their finances and are hunkering down - real retail spending has fallen for three straight quarters.

The RBA’s recent decisions to hold rates have been close calls. Between now and the next board meeting on September 5, there will be data on wages, unemployment and the monthly inflation rate. Each will have a material effect on the RBA’s deliberations on interest rates and each needs to be ‘soft’ to lock in another rates-on-hold decision from the bank.

That means the wage price index rising by 4 per cent or less in annual terms. It means employment growth under 35,000 for the month, with the unemployment rate coming in at 3.5 or 3.6 per cent. It also means the inflation rate is steady to down in July, noting that there are some seasonal price hikes to filter in the inflation data in that month.

The outlook for the economy presented by the RBA points to interest rates remaining on hold at 4.1 per cent for the next few months, at least.

However, if those forecasts are wrong to any significant extent, the RBA will be quick to move, given its requirement to have inflation in a 2-3 per cent target band, while maintaining full employment.

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