Economic conditions in Australia are predicted to remain strong on the back of a strong spending pulse as election-related stimulus boosts incomes and unemployment hits 50-year lows, but cost-of-living headwinds and a more uncertain external environment have compelled Morgan Stanley to trim its 2022 GDP forecast from 4.5 per cent to 4.2 per cent.
According to the investment manager, the domestic outlook has become slightly challenging given tightening financial conditions and persistent inflationary pressures.
“An important change to Morgan Stanley’s outlook has been incorporating the stronger inflation pulse that has emerged,” the investment manager said in a recent outlook.
Morgan Stanley’s analysts expect inflation to peak at 6.1 per cent in the third quarter, lower and later than most other developed market economies. This, they explained, is driven by lower energy costs, a more inertial wage setting and some government subsidies.
They also expect a shift in drivers as inflation falls, towards rents and market services inflation given a further rise in wage growth.
Morgan Stanley identified housing as a key headwind, noting that while a slow in price growth won’t lead to “significant” mortgage stress, it will slow economic growth through wealth effects, lower turnover-related spending and an eventual decline in the construction pulse.
As for how the Reserve Bank of Australia (RBA) is tipped to react to tighter times, the investment manager’s team expects rate hikes of 25 bps in June and July, with a 40-bp hike in August on the back of updated inflation data.
“Follow-up hikes in November and December would see a cash rate of 1.75 per cent by year-end.
“The path for next year will be much more dependent on the economy's endogenous response to rate hikes, and our expectation for house price declines and rising unemployment means we see these slowing significantly – with the cash rate at 2.25 per cent by year end,” Morgan Stanley said.
It warned that a more aggressive reaction from the RBA, one that would push rates up to 2.5 per cent this year, would halt economic activity in 2023, which would in turn shift the central bank towards cutting rates.
Financial markets are pricing in a 40-bp rate hike at the RBA’s next meeting on Tuesday.
Maja Garaca Djurdjevic
Maja's career in journalism spans well over a decade across finance, business and politics. Now an experienced editor and reporter across all elements of the financial services sector, prior to joining Momentum Media, Maja reported for several established news outlets in Southeast Europe, scrutinising key processes in post-conflict societies.
