A major economics firm says the Reserve Bank has gone too far in raising interest rates and has forecast a “consumer recession” as Australians struggle with soaring payments.
A Deloitte Access Economics report states the past two rate jumps in February and March were “unnecessary” and the rises should have been halted earlier than April.
The report warned Australians were under huge financial pressure, with some 300,000 households earning less money in wages than they are paying on higher mortgage costs and other expenses.
Lead author Stephen Smith said 15 per cent of variable-rate, owner-occupier mortgage holders would be in negative cashflow by the end of 2023.
“On these numbers, at least 300,000 Australian households may currently be experiencing negative cash flow, with mortgage repayments and essential living expenses together exceeding household disposable income,” Mr Smith said on Tuesday.
“That should shock all of us.”
The Deloitte report said the past 50 basis points of increases had served only to dampen Australia’s growth outlook, with the nation “facing the weakest rate of economic growth outside of the pandemic since the recession of the early 1990s”.
“A ‘consumer recession’ is now forecast in 2023, with household spending expected to finish the year below where it started,” the report stated.
The report said Deloitte’s view was that the surge in inflation that began in the March quarter of 2022 was “largely (but not solely) a supply-side story”.
This was caused by congestion in global supply chains, higher energy prices and elevated transport costs that were pushing up the prices of goods.
But the RBA was trying to fight inflation by curbing consumer demand, the report said.
Mr Smith said while most Australians would cope with the cash rate hitting 3.6 per cent, many would not.
“In just 10 months, the cost of servicing an average $600,000 mortgage will have risen by more than $14,000 per year once those rate hikes are fully passed through,” he said.
Mr Smith also said renters were under pressure from sky-high prices and this cohort were only going to be squeezed tighter on predictions that new home building would barely keep pace with population growth.
Against the backdrop of household pain, a lull in dwelling construction and a shaky global environment, the firm’s economists have revised their expectations for economic growth down to 1.5 per cent in 2023 and 1.2 per cent in 2024.
This will be the weakest growth outside the pandemic and the recession of the early 1990s.
Further interest rate hikes have not been ruled out, with the minutes from the RBA’s April cash rate decision, to be released on Tuesday, hopefully containing some clues about the bank’s future decisions.
While the minutes are unlikely to add much more to subsequent public appearances by RBA board members, they may offer some insight into how the central bank will interpret incoming data, including the quarterly consumer price index due next week.
