Australia’s Economy Seen Growing Slower As Interest Rates Rise

(Bloomberg) -- Australia’s economy will expand at a slower pace than previously anticipated this year and next as rapid interest-rate increases to tackle inflation weigh on consumption, a Bloomberg survey showed.

The A$2.2 trillion ($1.5 trillion) economy will grow an annual 3.3% in the fourth quarter and 3.1% in the first three months of 2023, down from previous forecasts of 3.8% and 3.6%, respectively, the poll of 45 analysts showed. The inflation outlook was raised by at least a percentage point in both periods.

“Higher inflation and higher interest rates will weigh on household consumption,” said Alan Oster, chief economist at National Australia Bank Ltd. He highlighted further risks ahead “including if rates move into more clearly restrictive territory or if the global economy deteriorates rapidly.”

The Reserve Bank of Australia surprised markets this month with a half-point increase in the cash rate, taking the benchmark to 0.85%, as the inflation outlook worsens. It’s widely expected to raise by the same amount again in July and traders are pricing in a cash rate of 3.4% by the end of the year.

Economists, who had previously expected the RBA to be more cautious than market pricing, are steadily increasing their own forecasts. They now expect the cash rate to finish the year at an average 2.45%, from 1.75% previously, before climbing to 2.6% in the first quarter and then holding there.

Despite the faster pace of rate hikes, economists still expect a soft landing for Australia’s economy, in contrast with a growing chorus of warnings about sharp Federal Reserve rate hikes eventually tipping the US into a recession. 

The optimism Down Under is helped by A$200 billion of household savings accumulated during the pandemic and a strong  jobs market. The survey showed economists expect unemployment to fall to 3.6% in the third quarter, from the current 3.9%, and then edge back up from the second quarter of 2023. 

“Ultimately, we still see a ‘soft landing’ for Australia, as household have built up savings to draw on and, importantly, we don’t expect unemployment to rise materially,” Oster said.

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