Canberra predicts economy will slow as rates hit but recession unlikely

The federal government is preparing for the economy to slow even further as shoppers struggle to make ends meet, but it believes Australia will avoid a recession as long as migration remains strong and China avoids a deflationary collapse.

As supermarket giant Coles revealed a lift in theft across some of its stores as cost-of-living pressures hit consumers, the government is increasingly confident that the country will avoid a wage-price spiral that would force the Reserve Bank to lift interest rates even higher.

Thefts from supermarkets have climbed as cost-of-living pressures hit consumers.Credit: Getty

Economic growth slowed to just 0.2 per cent through the first three months of the year under the weight of the RBA’s aggressive tightening of monetary policy. By March, it had taken official interest rates to 3.6 per cent.

Since then, the bank has increased interest rates by another half a percentage point. The combination of high interest rates and high inflation has prompted fears among some economists that the country could end up in a recession.

But while the government believes economic growth will be slow for the rest of this year and into 2024, senior government sources say it is not expecting a recession.

In the May budget, the government forecast the economy would expand by 1.75 per cent in 2023 before slowing to 1.5 per cent in 2024. The Reserve Bank has become more pessimistic about the outlook, in part due to its increases in official rates.

Earlier this month, it forecast the economy to grow by just 0.9 per cent this year, largely due to subdued consumer spending and a drop-off in outlays on new housing.

The government has noted that consumer spending has been weaker than expected in response to the RBA’s interest rate rises. But population growth, led by international students including many from India, has prevented a collapse in overall household spending, which accounts for about 60 per cent of national economic activity.

AMP chief economist Shane Oliver cautioned that the chance of a recession remained 50:50, given the financial headwinds facing many Australians.

He said the full impact of previous interest rate increases was yet to flow through the economy and that consumers were already struggling under the weight of higher monthly mortgage repayments.

“It’s still a big risk. It’s still around 50 per cent,” Oliver said. “If you’ve got an average mortgage of about $600,000, you’ve had $15,000 taken out of your spending power. Eventually, that’s going to act as a drag on the economy.”

Outgoing Reserve Bank governor Philip Lowe has spoken often of the “narrow path” facing the economy. The government believes this path could be derailed by events playing out in China.

Global investors have become increasingly concerned about Australia’s largest trading partner, which is experiencing deflation amid growing losses across its major property developers.

ANZ senior economists Raymond Yeung and Zhaopeng Xing on Tuesday warned that China could fall into a liquidity trap – where consumers and businesses hoard cash rather than spend or invest it – as the economy grew at a slower rate than the interest on its debt.

Fears about the strength of the Chinese economy could weigh on the Australian economy.Credit: AP

The Australian government is also preparing for a delayed impact from higher interest rates to feed into the jobs market, which has shown signs of softening in recent months. The July unemployment rate lifted to 3.7 per cent.

A key concern of the Reserve Bank has been a “wage-price spiral”, under which workers would push up wages, in turn fuelling inflation. Last week, two key measures of wages – the wage price index and average weekly earnings – showed wage growth actually moderating over recent months.

The government is increasingly confident that wage growth has been kept in check, making it easier for the Reserve Bank to keep interest rates steady or consider a cut in 2024.

But it is wary of the cost-of-living pressures increasingly weighing on consumers.

Coles chief executive Leah Weckert revealed on Tuesday a 20 per cent increase in theft and other forms of stock loss from the company’s supermarkets was having a major impact on its operations.

She said while most consumers did the right thing when shopping, there had been a lift in organised retail crime over recent months.

“We are seeing a lot more reports coming through from the stores where there is a loss incident which is quite large,” she said.

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