RBA downgrades growth in 2023

The Reserve Bank says Australians should brace for 2023 to be the weakest year for the economy in over three decades outside the pandemic, but we will still avoid a recession.

Reserve Bank of Australia governor Philip Lowe at the end of his seven-year term in mid-September will be replaced by his deputy, Michele Bullock. Picture: NCA NewsWire / Nikki Short

The Reserve Bank says Australians should brace for 2023 to be the weakest year for the economy in more than three decades outside the pandemic, but the nation is still on track to avoid recession.

The RBA’s quarterly Statement on Monetary Policy, released on Friday, also revealed the central bank board again considered the case for hiking rates at its meeting this month before deciding to pause for a second month.

The RBA downgraded nat­ional economic growth this year, from 1.2 per cent to 0.9 per cent, but predicted a faster deceleration in inflation that would prevent workers’ pay from falling in 2023.

In an update to the economic outlook, the RBA economists believe consumer price growth will slow from 6 per cent in the year to June to 4.1 per cent by December – well below the previous estimate in May that prices would rise by 4.5 per cent through 2023.

Inflation will drop through the next two years to be back within its 2-3 per cent target range by the end of 2025.

Growth will accelerate to 1.6 per cent in 2024, and again to 2.3 per cent in 2025, suggesting the RBA’s economists believe the country remains on the “narrow path” to taming inflation without triggering a recession.

The jobless rate will reach 4 per cent – up from 3.5 per cent now – by December, and peak at around 4.5 per cent a year later.

This is despite employment continuing to grow out to the end of 2025.

News that the central bank board’s decision to keep its cash rate at 4.1 per cent was a close call comes as several economists over recent days have said they no longer expected further hikes, and the next likely move in rates would be down.

The RBA’s latest report, however, said “the board’s current assessment is that the risks around the inflation outlook are broadly balanced”.

“There are both upside and downside risks to the inflation outlook,” it said.

“Inflation could be more persistent than forecast if wages growth is stronger than expected, if productivity growth fails to recover or if profit margins widen as input costs decline, even as the economy slows.

“On the other hand, declines in global cost pressures could pass through more quickly to domestic prices than assumed, supported by weak consumer demand.”

The labour market was “still tight” and this was feeding through to higher pay claims.

“At the same time, productivity growth remains weak, which is contributing to strong growth in costs,” the report says.

“While goods inflation has slowed, services inflation remains strong.”

“The board is also mindful that the typical lags of monetary policy mean that the full effects of the interest rate increases to date on demand, the labour market and inflation are yet to be seen,” the report said.

These “typical lags” have been accentuated by the wave of 150,000 households that will make what many will find is a difficult transition off ultra-low fixed mortgage rates in the September quarter alone.

“Many households are experiencing a painful squeeze on their budgets, reflecting the high cost of living but also the fast pace of the interest rate increases so far,” the RBA report said.