Westpac has forecast a slowdown in the growth profile for the Australian economy, from 2.6 per cent in 2022 to 1.0 per cent in 2023, and 2.0 per cent in 2024.
The bank projected that a decline in economic conditions will eventually persuade the Reserve Bank of Australia (RBA) to reconsider its monetary policy.
“A six-month period of a stagnant economy and no growth in household spending will alert the RBA to the need to ease policy settings in 2024,” said Bill Evans, Westpac chief economist.
“Overall output growth in 2024 is forecast to improve to 2 per cent, with the bulk of that expansion (1.5 per cent) coming in the second half of the year.”
Moreover, Mr Evans predicted that inflation will be lower in 2024 (at 3 per cent) than the RBA’s current forecast of 3.25 per cent, allowing the RBA to cut rates by around 100 basis points through that year.
“The sharp economic slowdown in 2023 will be partly engineered by the need for the RBA to continue lifting the cash rate in the first half of 2023 as wages growth and inflation remain uncomfortably high,” Mr Evans explained.
However, Mr Evans acknowledged that inflation and wages may fall much more quickly than the bank envisages, allowing the RBA to bring forward the rate cuts and avoid the last hike (to 3.85 per cent) that it anticipates for May.
Conversely, inflation in 2023 may be “stickier” than expected, Mr Evans said. In this scenario, he noted that the RBA may be unable to cut rates in 2024, therefore, “condemning the Australian economy to another very difficult year with weak growth and no prospect of any interest rate relief”.
As such, Westpac advised businesses to embrace the difficult growth outlook and to abstain from excessive price increases or outbidding competitors for scarce labour next year.
Expounding on this, Mr Evans commented: “The prospect of flat growth should convince businesses that large wage increases and rising prices will be unsustainable by the second half of 2023.”
