Powered by MOMENTUM MEDIA
investor daily logo

Australia headed for ‘rate cut resistant recession’: Deutsche Bank

  •  
By Charbel Kadib
  •  
4 minute read

The global investment bank is expecting Australia to slip into recession next year, underpinned by inflationary pressures and sharper-than-anticipated deterioration in labour market conditions. 

According to an analysis from Deutsche Bank chief economist for Australia Phil O’Donaghoe, headline inflation would end 2023 at 5.3 per cent, above the Reserve Bank of Australia’s (RBA) target of 4.7 per cent.

This would place further upward pressure on interest rates, with the RBA tipped to lift the cash rate to a “terminal rate” of 3.35 per cent by February 2023.

But Mr O’Donaghoe has acknowledged growing “risks” that the RBA would pause its monetary policy tightening cycle as early as next month.

==
==

But a prospective pause, he added, would be short-lived.

“If a ‘pause’ does happen, we expect it will be exactly that, i.e. a delay to further hikes rather than a sign that the hiking cycle is ‘done’,” he said.

“We still see the risks tilted to a higher terminal rate, but those risks have diminished over the past month.

“Recent RBA actions and commentary suggest that the hurdle for incremental tightening is getting higher.”

However, a softening in the RBA’s monetary policy stance is unlikely to translate into easing any time soon. 

“Our forecasts have inflation still well above target by the end of 2023,” Mr O’Donaghoe observed.

“With that, we now see a longer period of policy on hold — we don't think the RBA will be in a position to cut rates until mid-2024.

“Relative to market pricing, our forecast nonetheless calls for a lower terminal and shorter ‘tail’.”

As such, Mr O’Donaghoe is forecasting a “rate cut resistant recession”, characterised by lingering inflationary pressures and weakness in labour market conditions.

Mr O’Donaghoe said he is expecting a 1 per cent increase in Australia’s unemployment rate, tipped to hit 4.5 per cent by the end of 2023 — well above the RBA’s forecast of 3.7 per cent.

“If our forecast is realised, that would qualify as a recession on our definition, even if — as our forecasts assume — GDP avoids two consecutive quarters of negative growth,” Mr O’Donaghoe added.

“We have long considered that ‘technical’ recession definition singularly unhelpful for Australia.

“From a welfare perspective, a 1 per cent rise in unemployment within a year is a far more useful description.”

If labour market conditions reflect the RBA’s forecast, inflation would “prove far more persistent” than is currently expected.

This, Mr O’Donaghoe added, would heighten risks of a “higher terminal rate increase”.