CBA’s economic analysis, released with the bank’s half-year results this week, assessed that Australia can avoid a recession despite high rates and an economic slowdown.
Growth in gross domestic product (GDP) was forecasted by the bank to come in at 1.1 per cent this calendar year, a significant drop from 5.2 per cent in 2021 and 3.6 per cent last year.
This is slightly below the expectations of the Reserve Bank of Australia, which placed 2023 GDP growth at 2.25 per cent.
Since Australia saw its first recession in three decades in 2020, when the economy contracted by 1.8 per cent amid COVID-19 lockdowns, the economy has kicked into gear thanks to monetary stimulus and easing of pandemic restrictions, which CBA explained had inspired a strong recovery in consumer spending and business investment.
But rising inflation in its wake has led the RBA to raise interest rates sharply over the past nine months, from a record low 0.1 per cent to 3.35 per cent earlier this month.
While inflation is thought to have peaked at 7.8 per cent in December 2022, CBA economists expect that the ongoing effects of the price rises may not resolve until the end of this year and that inflation will only start to return to the RBA’s target range of 2–3 per cent in 2024.
“To achieve that, the RBA last week flagged that the official cash rate will have to go up further,” CBA said in a statement.
The bank now expects the RBA to increase interest rates to 3.85 per cent, with rises of 0.25 per cent in both March and April, which, it predicted, will be followed by a pause to review the full impact of high rates on household and business consumption.
Given the backdrop of a predicted fall in consumer sentiment, a slowdown in spending and weaker house prices, CBA’s economists explained that interest rates will have to be cut in the fourth quarter of 2023 for Australia to avoid a recession.
CBA, however, offered the silver lining, noting that current and future growth will continue to be led by low levels of unemployment and under-employment and high participation rates while exports and non-mining investment continue to hold up well.
“The pressures of a tight labour market should also be eased with a swifter return in net overseas migration,” CBA concluded.
