Commonwealth Bank’s miserable recession prediction

One of the four big banks has offered a gloomy update to its economic forecast but there is “light at the end of the tunnel”.

One of the four major banks has offered a gloomy update to their economic forecast, predicting a 50 per cent chance of recession but noting there is “light at the end of the tunnel”.

In an Economics Insights report released today, Commonwealth Bank head of Australian Economics Gareth Aird said he expects consumers to drive the downturn, with household consumption falling per capita, and possibly outright this year.

“We put the odds of a recession in 2023 at 50 per cent as the lagged impact of the RBA’s rate increases continues to drain the cash flow of households that carry debt,” he outlined in the report.

The bank expects one further 25 basis point increase in the cash rate for a peak of 4.35 per cent.

“We consider the hike is most likely at the August board meeting,” he wrote.

“There is also a risk of 25bp rate rise in both July and August which would take the cash rate to 4.6 per cent.”

Homeowners have been hit with multiple rate rises in the past year. Picture NCA Newswire/ Gaye Gerard

In further rough news, the bank is predicting the unemployment rate to increase to 4.4 per cent by the end of 2023, and jump to 4.7 per cent by mid-2024.

But, in a relief to Aussies battling with the cost-of-living crisis, inflation is predicted to decline to 3.8 per cent by late 2023.

It is currently sitting at 6.8 per cent.

The bank also predicts the cash rate to be slashed by 125 basis points in 2024 which would take it to 3.10 per cent by the end of 2024.

“As interest rates are cut it will free up cash for those borrowers that have a mortgage,” he wrote.

“And the demand for credit will begin to lift. As this happens economic momentum will start to pick up and the upward trend in the unemployment rate will wane.”

‘Light at the end of the tunnel’

So while CBA expects 2023 to be something of an annus horribilis for the Australian economy, Mr Aird is more upbeat about the prospects when we get through to the other side of 2024.

“Economists don’t take pleasure in downgrading the outlook for economic growth and upwardly revising their forecasts for unemployment,” Mr Aird wrote.

“But there is light at the end of the tunnel.”

He argued once the “proverbial ‘inflation dragon’ is slayed, monetary policy will be able to move away from a deeply restrictive setting to a more neutral one”.

Tough time for mortgage holders

This week Australia’s central bank delivered another blow to borrowers across the country as it hiked interest rates yet again.

On Tuesday afternoon, the RBA increased the cash rate by 25 basis points, bringing it to 4.10 per cent, a significant jump from the historic pandemic low of 0.1 per cent that Aussies enjoyed for more than two years.

This marks the 12th time the bank has hiked rates since May last year, and is the highest the cash rate has been for the past 11 years.

RBA governor Philip Lowe. Picture: Britta Campion / The Australian

Mortgage owners have been hit with a 400 basis point hike in the space of a year in what has been hailed as the fastest tightening cycle on record, as inflation stays stubbornly high.

April 2023 has been the only exception, when the RBA briefly paused rates, giving mortgage holders a much-needed reprieve.

Treasurer Jim Chalmers said while he does his best to not “second guess” the RBA, the latest increase will make life for mortgage holders “much harder”.

“I do expect that there will be a lot of Australians who will find this decision difficult to understand and difficult to cop,” he told reporters.

“The Reserve Bank’s job is to squash inflation without crashing the economy and they will have lots of opportunities of course to explain and defend the decision that they’ve taken today.

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