Australia tipped to avoid recession this year, but it will still feel like one for many

Australia will avoid a recession this year but for many households it will feel like one, some of the nation’s top economists have predicted while warning the Reserve Bank’s aggressive interest rate rises are the largest economic risk.

Members of The Sydney Morning Herald/The Age Scope survey panel believe the RBA and its fight to bring down inflation will be the key influence on the strength of the economy through 2023 and into next year.

The Reserve Bank is forecasting the economy to grow by just 1.5 per cent this calendar year and through 2024.Credit: Fairfax Media

Data to be released on Wednesday is expected to show the economy expanded another 0.8 per cent through the final three months of 2022, taking annual growth to 2.8 per cent. Figures on Monday showed a drop in the volume of manufacturing and wholesale trade sales through the quarter but a 10.6 per cent jump in company profits, while wages and salaries increased by 2.6 per cent to be 11.6 per cent higher through the year.

But the RBA, which has lifted interest rates at its past nine consecutive meetings – from 0.1 per cent in May to 3.35 per cent this month – and is expected to raise them again next week, is forecasting the economy to grow by just 1.5 per cent this calendar year and through 2024.

KPMG Australia chief economist Brendan Rynne told the exclusive survey of 20 economists he did not expect a recession this year, although there could be a small contraction in the size of the economy in the current March quarter before growth through the following quarters.

Rynne said much hinged on the RBA’s aggressiveness, which financial markets suggest could take the official cash rate to 4.25 per cent by September.

“The risk to this outlook is towards the downside and is largely dependent on how hard the RBA uses monetary policy to bring inflation back towards the target band,” he said.

“If the market is correct and the cash rate moves up to around 4.25 per cent, then there is a greater likelihood that consumption activity will grind backwards, [the] housing investment slowdown will worsen and business investment will weaken.”

Australia last suffered two consecutive quarters of negative growth in 2020 at the height of the COVID-19 pandemic.

Senior ANZ economist Adelaide Timbrell is tipping the economy to grow by 1.5 per cent this year before slowing to just 1.2 per cent in 2024.

She said strong population growth, a tight jobs market and a lift in nominal wages would support the economy, but a per capita recession was possible.

“In 2024, we expect a per capita recession, where average economic activity per person goes slightly backwards. This is not an uncommon phenomenon in Australia, with the most recent example before COVID occurring in 2018,” she said.

University of Melbourne economist Neville Norman puts the chance of a recession this year at 5 per cent.

He said a series of incidents on top of the war in Ukraine and its impact on commodity prices, global uncertainties and the RBA’s rate rises would have to occur to stop the economy from growing.

CEDA senior economist Cassandra Winzar said growth would be supported by ongoing infrastructure projects and demand for Australian commodities.

“It could be close, but on balance, Australia should avoid a recession this year, barring any major external shocks,” she said.

Westpac Business Bank’s Besa Deda and Jameson Coombs said there was some risk of a shallow technical recession.

“We expect a sharp slowdown in household spending this year as interest rates and inflation bite, however, we do see some resilience in spending due to the strength of the labour market, accumulated savings and rising nominal wages,” they said.

Barrenjoey economist Johnathan McMenamin believes the economy could be inadvertently tipped into recession.

“Tighter monetary policy and the uncertainty of the current economic cycle raise the chance of a policy mistake, tipping the economy off the narrow path and into recession,” he said.

Commonwealth Bank’s head of Australian economics, Gareth Aird, said the fate of the economy was largely in the Reserve’s hands.

“The RBA will ultimately determine if Australia has a recession this year or not,” he said.

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