Australia’s economic growth expected to drag in 2023

Coming off a year marked by persistently high inflation, aggressive central bank tightening and slowing growth, Australia’s GDP growth is predicted to fall from 4 per cent in 2022 to 1.5 per cent in 2023, according to ANZ economists.

“We have downgraded our Australian GDP forecast to 1.5 per cent y/y by end 2023, [from 1.8 per cent] reflecting a sharper slowdown in household consumption growth through 2023 than previously factored in,” ANZ’s Catherine Birch said.

“Our 1.2 per cent forecast for end-2024 is unchanged.

“We expect Australia will avoid recession, particularly given the tailwind from the recovery in net migration.”

Recent ANZ spending data suggested that household spending lost momentum towards the end of the year, which could signal the beginning of a cyclical slowdown.

“We see household consumption growth dropping from 6 per cent y/y at end-2022 to 1.5 per cent by end-2023, as the catch-up in services spending runs its course, the cost of living eats into real incomes, and higher interest rates bite.”

The Reserve Bank of Australia (RBA) has increased the official cash rate from 0.1 per cent at the beginning of 2022 to 3.1 per cent at the end of the year, lifting rates 300 basis points (bps) over the year.

Despite the particularly aggressive tightening period, its final monetary meeting minutes revealed that the central bank considered ‘no change in the cash rate’ for the first time this year.

The decision to lift the rate a further 25 bps in December came as “inflation was expected to take several years to return to the target range” of 2 to 3 per cent.

While the new development may have signalled that the central bank is beginning to ease its tightening, most economists agree there will be more hikes in 2023.

“We see the cash rate peaking at 3.85 per cent by May 2023 with no cuts until late 2024,” ANZ’s Catherine Birch said.

Westpac’s growth estimates equally pessimistic

Westpac has forecast a slowdown in the growth profile for the Australian economy, from 2.6 per cent in 2022 to 1.0 per cent in 2023, and 2.0 per cent in 2024.

The bank projected that a decline in economic conditions will eventually persuade the RBA to reconsider its monetary policy.

“A six-month period of a stagnant economy and no growth in household spending will alert the RBA to the need to ease policy settings in 2024,” Westpac chief economist Bill Evans said.

“Overall output growth in 2024 is forecast to improve to 2 per cent, with the bulk of that expansion (1.5 per cent) coming in the second half of the year.”

Moreover, Mr Evans predicted that inflation will be lower in 2024 (at 3 per cent) than the RBA’s current forecast of 3.25 per cent, allowing the RBA to cut rates by around 100 bps through that year.

“The sharp economic slowdown in 2023 will be partly engineered by the need for the RBA to continue lifting the cash rate in the first half of 2023 as wage growth and inflation remain uncomfortably high,” Mr Evans explained.

However, Mr Evans acknowledged that inflation and wages may fall much more quickly than the bank envisages, allowing the RBA to bring forward the rate cuts and avoid the last hike (to 3.85 per cent) that it anticipates for May.

Conversely, inflation in 2023 may be “stickier” than expected, Mr Evans said. In this scenario, he noted that the RBA may be unable to cut rates in 2024, therefore, “condemning the Australian economy to another very difficult year with weak growth and no prospect of any interest rate relief”.

As such, Westpac advised businesses to embrace the difficult growth outlook and to abstain from excessive price increases or outbidding competitors for scarce labour next year.

Expounding on this, Mr Evans commented: “The prospect of flat growth should convince businesses that large wage increases and rising prices will be unsustainable by the second half of 2023.”

Despite the pessimistic growth projections, federal Treasurer Jim Chalmers described the September quarter’s results by the Australian Bureau of Statistics (ABS) of a 0.6 per cent expansion to the economy as a “strong result”.

Yet, equally signalled “uncertainty” was ahead and the government’s May budget would reflect further tightening. 

[Related: Restraint is in order: Treasurer]