- ANZ has upgraded its economic forecasts, revealing it expects an even stronger and more prolonged boom in Australia.
- Its economics team now expects 5% growth this year and 3.5% next year, with unemployment to fall to just 4.4% by the end of next year.
- Such a scenario would force the RBA’s hand and bring on interest rate hikes in 2023, placing mortgage holders under increasing financial stress sooner than anticipated.
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The Reserve Bank might be adamant it is raising interest rates until “at least” 2024, but economists are becoming increasingly sceptical it will be able to hold the line, raising questions of how the economy will cope.
On Thursday, ANZ Bank economists revealed they had upgraded their forecasts, as Australia’s economy looks set to boom longer and harder than first thought. In a research note, the economics team said it now expects Australia to grow at 5% this year and 3.5% into the next.
The forecasts would see the economy finish 2022 8.6% larger than it began 2021. Such rollicking growth would slash unemployment under 5% again this year, 4.4% next year, and reduce it to just 4.2% by the end of 2023.
If it all pans out, and that’s a big if, it would create an almost unprecedented jobs boom. For comparison, the last time the unemployment rate flirted with such levels was in 2009, on the back of more than a decade of consistent growth. This time around the Australian economy would have done the same heavy lifting in the space of just three years, boosted by an unprecedented amount of government spending and easy money policy.
Not that the RBA may be able to maintain record low interest rates for long. Despite providing forward guidance that the central bank won’t lift rates off the floor until well into 2024 and possibly beyond, ANZ believes the boom will force its hand.
“We have the RBA tightening in two steps in [the second half of] 2023, to take the cash rate to 0.5% by end-2023, as the conditions it has set out for such a move are met: inflation sustained above 2.0% and wages growth above 3%,” its economics team said on Thursday.
“The tighter labour market will drive wages growth and ultimately inflation higher. We expect annual growth in the wage price index to accelerate to 3.0% in [the second half of] 2022, and hold a little above 3% through 2023 even as the opening of borders boosts the supply of labour.”
The stage is set, in other words, for the central bank to actually achieve its mandate and potentially push it to begin putting down the “unconventional” tool kit and ‘whatever it takes’ approach, adopted through the pandemic.
Such tremendous growth, while welcome, comes with its own set of challenges. For one, as the RBA would be acutely aware, stimulus during a crisis is relatively easy, but it is the tightening of monetary policy that is far risker.
As interest rates rise again, Australia’s legion of new homeowners will be placed under increased financial stress as they try to service mortgages approved as property prices broke record highs.
While an official cash rate of 0.5% may not seem very high, it is five times the current rate, with ANZ expecting it to be done in just two hikes in a very short period of time.
While this it the most likely scenario in the eyes of ANZ, it would be a significant change of pace for the RBA which has consistently failed to hit its inflation target. Then again, as the central bank’s previous wage predictions quite neatly demonstrate, nothing is guaranteed.
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