Federal Budget 2023: Australia to avoid recession as next interest rate cut and pay rise

Millions of Australians can expect some relief on their interest rates as the country is set to avoid a dreaded recession and more jobs are on the way.

Australia is expected to avoid a dreaded recession as the economy outperforms our global peers, and interest rate relief and wages growth are not far off.

The budget documents predict that the official cash rate has plateaued and could start declining from early next year, down to about 3 per cent by June 2025.

Real wage growth – adjusted for the impact of inflation – is predicted to return next financial year, sooner and stronger than expected.

Treasurer Jim Chalmers warned in his budget speech on Tuesday that growth in the global economy over the next two years was expected to be the weakest in two decades, outside of the pandemic and the global financial crisis.

This would naturally flow through to have an impact on the Australian economy, with economic growth expected to slow from 3.25 per cent in the current financial year to 1.5 per cent next year, followed by 2.25 per cent the year after.

“Despite this, our economy will continue to create jobs, and unemployment is expected to remain low by historical standards – 4.25 per cent in 2023-24, 4.5 the year after,’’ Dr Chalmers said.

Treasurer Jim Chalmers in Parliament House in Canberra. Picture: Gary Ramage

In this environment, inflation “remains our primary economic challenge,’’ the Treasurer said.

“Our policies to ease the pressure on households will take three quarters of a percentage point off inflation in 2023–24, which is expected to fall from 6 per cent this year to 3.25 per cent next year,’’ Dr Chalmers said.

This was “still higher than we’d like for longer than we’d like – but tracking in the right direction’’, and the forecast is for inflation to be back in the Reserve Bank’s target range of 2-3 per cent during 2024-25.

The budget documents predict that the official cash rate – which is set by the RBA and increased from 0.1 per cent to 3.85 per cent over 11 rate rises from May last year until now – will start dropping early next year, but its decline will be gradual.

“Financial markets and market economists now expect the cash rate to remain at 3.85 per cent until early 2024, before gradual cuts back to 3 per cent by June 2025,’’ the budget documents state.

The budget predicts that the official cash rate – which is set by the RBA– will start dropping early next year.

Keep in mind that the budget documents released in October last year predicted the cash rate would top out at 3.35 per cent.

Dr Chalmers said wages were now growing at their fastest rate since 2012, with nominal wage growth expected to build to 4 per cent next financial year, providing an increase in real take home pay once the predicted lower inflation rate is factored in.

“Wage growth is expected to remain robust at 3.25 per cent in 2024-25, materially faster than the outcomes achieved in the decade prior to the pandemic,’’ the budget documents state.

“This pick-up in wages growth remains consistent with inflation returning to the target band in 2024-25.

“Annual real wage growth is now expected to resume in early 2024, for the first time since early 2021 and slightly ahead of the October budget forecasts.

“By the June quarter of 2024, real wages are expected to grow by 0.75 per cent, helping to drive the recovery in domestic activity.’’

The budget documents say the downside risks to the economy were a potential worsening of global economic conditions, and more persistent global inflation.

“Domestically, the ongoing cost-of-living pressures may see households reduce their spending more than is anticipated,’’ the documents say.

“Any additional persistence in inflation that keeps interest rates higher for longer would further heighten this risk.’’

Originally published as Federal Budget 2023: Australia to avoid recession as next interest rate cut and pay rise