BILL’S BITES: Australia to dodge recession, despite headwinds

Bill Evans
03:15pm February 01 2023

Persistent high inflation means the RBA will need to keep lifting interest rates in the first half of 2023. That will add to pressure on households, but the economy should be able to avoid a recession thanks to the strong savings buffers people built up over the pandemic. 

The December quarter inflation report will have come as a shock to the RBA, almost guaranteeing another 25 basis point rate increase in February. Underlying inflation came in at 6.9 per cent, well above the central bank’s expectations of 6.5 per cent. 

Just as important will be the guidance that we get from the Reserve Bank on Feb. 7. 

I think they'll retain a high degree of flexibility, but the likelihood is that more evidence of rising wage pressures will mean another rate hike will be necessary at the March 7 board meeting.

After that, I think they can go on hold and await the March quarter CPI report that will be available for the May meeting. Our expectations are that inflation will still be running high enough to convince the RBA that a further rate hike is needed. 

As we go into the second half of the year, the economy is set to stagnate under the weight of those high rates, but we're not expecting a recession. 

This economic cycle is different to previous cycles in that we've seen households accumulate A$250 billion in excess savings, A$110 billion of which is accumulated in redraw accounts.

The labour market will remain relatively tight, so households will have a number of ways in which they can offset the high rates: They can draw down on their accumulated savings; they can cut back on their savings overall; while many will also enjoy reasonable income growth from jobs availability and wages growth.

All of those factors represent some upside risk to our forecasts, and if they play out, then it will be more difficult for the Reserve Bank to justify the rate cuts early in 2024 which are our central view at the moment.
 

Bill Evans

William (Bill) Evans is Westpac’s economic spokesman and is responsible for all of our economic research. In 1991, Bill joined Westpac as the Chief Economist and Head of Research. A graduate of Sydney University (BEc. Hons I and University Medal) and the London School of Economics (M. Sc.), Bill has worked as Research Manager for the Reserve Bank of Australia and as a Treasurer at the Commonwealth Bank of Australia. Bill travels frequently, advising Westpac’s customers on the Australian economy and financial markets.

Don't miss

Related articles

BILL’S BITES: RBA rate cuts could begin next August

By Bill Evans
Chief Economist, Westpac

BILL’S BITES: RBA’s August pause could signal rate peak

By Bill Evans
Chief Economist, Westpac

BILL’S BITES: Consumers gripped by deep pessimism

By Bill Evans
Chief Economist, Westpac

Browse topics