Ghost of 1989 ‘may come to haunt us’, says economist

NAB chief economist Alan Oster has told Australians to ‘remember 1989’ – the last time the Reserve Bank sunk the economy via a punishing series of rate hikes.

NAB chief economist Alan Oster.

NAB chief economist Alan Oster has told Australians to “remember 1989” – the last time the Reserve Bank sunk the economy via a punishing series of rate hikes that appeared to be having no effect but ended in a severe recession and soaring unemployment.

Mr Oster joined most of his peers in predicting the RBA would deliver a fifth straight 0.5 percentage point rate rise to 2.85 per cent at its Tuesday board meeting.

That would be followed by a further 0.25ppt increase in Nov­ember, he said, before the central bank held fire and waited to see how households and the economy more broadly would cope with three percentage points in hikes in seven months.

Mr Oster was the latest economist to warn that the nation could pay a heavy price for a “policy mistake” by RBA governor Philip Lowe and his fellow board members as they move from being too slow to tighten policy to slamming on the brakes too aggressively in their battle to not let the “scourge” of very high inflation – as Dr Lowe has called it – become embedded in the economy.

With retail spending still at record levels and yet to register any hit from the RBA moves so far, Mr Oster said business conditions remained buoyant as firms passed on higher costs to customers who have been happy to pay.

But he cautioned of the lagged impact of monetary policy. “When we look at our (mortgage) book, we can see the consumer has not yet had significant increases in their interest payments. That’s occurring in October and November. That means the next few months will be very important to see how quickly the economy slows.”

So far, no economists – including Mr Oster – are predicting a recession in Australia but he did say: “Do remember ‘89, when the RBA kept putting up rates and nothing happened until it all fell over”.

Dr Lowe has repeatedly referred to a “narrow path” he is trying to tread to keep the economy on an “even keel” while bringing consumer price growth sustain­ably back towards the 2-3 per cent target range.

Steering this path has become further complicated by a worsening global economy.

In the US, the Federal Reserve has made it plain a policy-induced recession will be necessary to douse a wage-driven inflation spiral. In Europe and the United Kingdom, ruinously high energy prices are threatening growth.

Mr Oster said he now expected essentially zero growth in all these three major economies in 2023.

Outside of Covid and the global financial crisis, Mr Oster said this was the worst outlook for global growth since 1993.

“Confidence (in Australia) will take a hit at some stage, associated with what’s happening in the world,” he said.

Merrill Lynch head of Australian economics Tony Morriss said he now expected 0.5ppt rate hikes in each of the next two months, and that rates would reach 3.75 per cent next year, which would inevitably come at the expense of growth and jobs.

Mr Morriss predicted inflation to reach 8 per cent in the September quarter – three months earlier and a little higher than the 7.8 per cent peak predicted by the RBA.

The strong momentum in the economy would keep growth and the labour market strong this year, before the global growth slowdown and high rates hit. Mr Morriss predicted growth of just 1 per cent in 2023, and that unemployment would end the year at 4.4 per cent, against 3.5 per cent now.