High Chance of Recession: Insights For 2023-24

Dayana Sabatin

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Economists have unanimously forecasted a decline in inflation within the next few years

In a comprehensive survey conducted by The Conversation, comprising 27 prominent economists, it was found that every economist expects a decline in inflation. The official quarterly inflation measure, which reached a peak of 7.8% in the year ending December, has now decreased to 7%. Similarly, the newer monthly measure peaked at 8.4% and has now fallen to 5.6%.

The key point of contention revolves around the speed at which inflation will continue to decrease, the number of interest rate hikes the Reserve Bank will implement to ensure a swift decline, and the potential harm these rate increases may inflict on an already fragile economy.

Of the 27 economists surveyed, 12 believe that a recession is either more likely than not or has an equal probability. Nearly all of them anticipate a "per-capita recession," in which economic growth fails to keep up with population growth, leading to a decline in living standards.

Now in its fifth year, The Conversation's survey draws on the expertise of esteemed forecasters from 25 Australian universities, think tanks, and financial institutions. The panel consists of economic modellers, former officials from Treasury, the International Monetary Fund, the Reserve Bank, and a former member of the Reserve Bank board.

Anticipated interest rate hikes for this year: two more to come

Following 12 interest rate hikes that propelled the Reserve Bank's cash rate from 0.1% to 4.1% in just over a year, the panel predicts an additional two hikes.

According to their forecast, the cash rate will reach 4.5% by the end of this year, gradually declining to 4.3% by the middle of next year and further to 3.9% by the end of 2024.

When asked about the month in which the cash rate will peak and its highest point, the panel settled on a peak of 4.7% in November.

A cash rate of 4.7% would raise the average mortgage rate from 5.4% to 6%, resulting in an additional $200 per month for servicing a $600,000 loan.

However, this heightened burden would be short-lived. The panel's average estimation suggests that the cash rate would remain at its peak for approximately six months before being reduced, indicating a decrease in rates starting in June of the following year.

Several economists cautioned against expecting rates to return to the emergency lows witnessed in 2020 and 2021. Some also noted that the one factor that could prompt the Reserve Bank to lower rates faster than anticipated would be a recession.

Plummeting inflation and a slight increase in real wages

The panel projects a decline in inflation from 7% to 5.2% by year-end, followed by a decrease to 3.9% by mid-2024, and further down to 2.9% a year later. These figures would bring inflation back within the Reserve Bank's target band of 2-3%.

Although the inflation decrease is substantial, it is not as rapid as predicted by the bank itself (3.6% by mid-2024) or the Treasury (3.25% by mid-2024).

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