Warning risks of Aussie recession rising

Living standards are also expected to decline considerably, the bank warned.

The Reserve Bank of Australia has pushed through one of its most aggressive cycles of interest rate hikes – with nine consecutive increases – taking it from record lows of 0.1 per cent to 3.35 per cent.

The central bank even considered a mega hike of 0.5 per cent for this month at its policy meeting.

Financial markets are betting that four more increases are coming. taking interest rates up to 4.35 per cent.

Meanwhile, NAB has forecast economic growth to slow to 0.7 per cent over 2023 and just 0.9 per cent in 2024.

But it has also foreshadowed the economy will come to a standstill by the middle of this year, increasing the risk of a recession.

“On GDP, we see the quarterly rate of growth slowing to around 0.1 per cent in mid-to-late 2023,” the team noted.

A recession is defined as two consecutive quarters of negative economic growth and if NAB’s dire forecast for later this year is off by a margin of 0.2 per cent, it could happen.

NAB doesn’t see economic growth picking up by 2.2 per cent until 2025 and has warned things could be far worse in terms of economic growth if the RBA continues to raise rates.

“We recently revised up our outlook for the cash rate in the near-term and now expect it to peak at 4.1 per cent in May 2023 and stay there until the RBA begins cutting in early 2024,” NAB said.

Yet, despite many Australians struggling, the RBA seems undeterred from raising interest rates.

The minutes from its February meeting noted that Australia’s cash rate was “lower than policy rates in many other comparable economies” and “while wages growth remained lower here than elsewhere, Australia’s positive exposure to higher commodity prices and the extra savings buffers accumulated by households were estimated to be larger than in other countries”.

In a post-meeting statement this month, RBA governor Philip Lowe also said “further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary”.

New research by the AMP Bank has shown that seven in 10 homeowners are worried about meeting their mortgage repayments if interest rates continue to rise, an increase of five per cent compared to October 2022.

As a result, more than two thirds of homeowners have made changes to their household budgets, the research revealed.

This included reducing spending on groceries, entertainment, clothing, holidays, and gifts to account for higher interest rates.

Clifford Bennett, Chief Economist at ACY Securities, said a severe slowing is now underway in the Australian economy, which points to a recession.

He said the Australian economy is largely struggling because it was overstimulated during Covid and interest rates were kept low for a “ridiculous amount of time”.

“Rates should be hiked when inflation is overheating in a demand driven economic period. This is not however a demand driven cycle that we are now in. Employment was never as strong as it appeared post-Covid and the private sector is in contraction for the fifth straight month,” he said.

“Raising rates in the current situation only adds pressure to an already stumbling economy with limited impact on inflation which has already been allowed to run free. The RBA left the gate open and didn’t even begin the chase until inflation was out of sight.”

Shooting into the air now will do little to help, he added, but he predicted the RBA will probably raise rates another four times, he said

“The RBA was the only central bank in the world to raise rates during the GFC. It did so three times. Then panic slashed to make up for sending NSW and Victoria into recession at the time,” he added.

Federal government policies must recognise that Australia is now in a prolonged period of subdued economic activity, he added, and “an essential part of the remedy requires immediate invasive surgery of the RBA”.

“It is the Australian people, families and the economy that are suffering from this rollercoaster economy that did not have to happen,” he said.

Higher levels of mortgage stress could be prompting a greater use of credit card too as debt collection company Arma Group revealed that in January and early February the average size of consumer debt it was chasing jumped by 30 per cent to more than $740 compared to last year.

It chases debts from energy providers, telcos, water utilities, local councils and health and fitness providers.

Other sectors are already warning that they are being battered by rising interest rates, with this year is slated to be the worst in over a decade for the residential construction industry.

Cash-strapped Australians are opting out of building their homes, which will lead to a massive slowdown in the sector.

That’s according to the latest Economic and Industry Outlook Report from the Housing Industry Association (HIA), released on Tuesday.

In the report, the HIA said the RBA’s pursuit to “slay the inflation dragon” with nine consecutive interest rate rises was bringing the building industry to its knees.

In fact, they said the outlook was dire for 2023, with conditions not seen like this since the global financial crisis.

NAB has also forecast a further 11 per cent decline in property prices this year, which is further bad news for the sector, after prices already fell by 9 per cent.

“Consistent with historical episodes of price declines and rate rises, activity in the housing market has fallen sharply,” NAB’s economists flagged.

“That said, while approvals have fallen, the pipeline of outstanding work remains elevated.

“This pipeline of work is likely to support construction activity in the near term as supply constraints ease but we expect dwelling investment to slow in the second half of 2023 and drag on activity in 2024 as the flow of new approvals is unable to offset relatively high rates of work done.

“At current rates of work done, there are around three to four quarters of outstanding work to be completed.”