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Why Australia could sink into a recession within by next year

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Australia could slide into recession by the end of 2024 if the Reserve Bank raises rates one more time.

New National Accounts data showed that Australia’s economy grew just 0.2 percent in the March quarter of 2023, marking its weakest growth in three months since mid-2021, when Sydney and Melbourne were in lockdown.

The Australian Bureau of Statistics was released on Wednesday, a day after the Reserve Bank hiked cash rates for the 12th time since May 2022, taking it to an 11-year high of 4.1 per cent.

AMP deputy chief economist Diana Mousina said just one 25 basis point rate hike this winter — bringing the spot rate to 4.35 percent — would be enough to trigger a recession.

“The hawkishness of the RBA and the subsequent likelihood of another rate hike in July or August means that a ‘real’ recession is very likely in the next 12 to 18 months,” Ms Mousina said.

Another rate hike marks the 13th hike in just over a year.

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Australia could slide into recession by the end of 2024 if the Reserve Bank (Governor Philip Lowe pictured) raises interest rates one more time

A 2024 recession, as AMP predicts, would be the first rate hike-driven economic contraction since 1991, after interest rates hit 18 percent in late 1989.

“In our view, the RBA is setting interest rates too high and doesn’t need to trigger a recession and hurt households to drive inflation down at a time when one of the forward-looking inflation indicators is already pointing to lower price growth in the coming months. six months,’ said Mrs Mousina.

Inflation fell to 7 percent in the March quarter, down from a 32-year high of 7.8 percent in the December quarter.

But it was still well above the Reserve Bank’s target of two to three percent.

The Commonwealth Bank, Australia’s largest home lender, now expects the Reserve Bank to raise interest rates to 4.35 percent by August.

Gareth Aird, Commonwealth Bank’s head of Australia’s economy, said there was an outside chance that the RBA would raise rates in July and August, bringing the cash rate to 4.6 percent – the highest since November 2011 .

“The RBA tightening cycle has been incredibly aggressive. The annual rate of inflation is currently much higher than desired,” he said.

AMP deputy chief economist Diana Mousina said just one 25 basis point rate hike this winter — bringing the spot rate to 4.35 percent — would be enough to trigger a recession

AMP deputy chief economist Diana Mousina said just one 25 basis point rate hike this winter — bringing the spot rate to 4.35 percent — would be enough to trigger a recession

“We now expect another 25 basis point increase in the cash rate to peak at 4.35 percent and most likely see it at the August board meeting.

What the latest rate increase means for you

$500,000: $81 per month up to $3,108 from $3,027; annual repayments up to $14,232 since May 2022

$600,000: $97 per month up to $3,730 from $3,633; annual repayments up to $17,088 since May 2022

$700,000: $114 per month up to $4,352 from $4,238; annual repayments up to $19,932 since May 2022

$800,000: $130 per month up to $4,973 from $4,843; annual repayments up to $22,776 since May 2022

$900,000: $146 per month up to $5,595 from $5,449; annual repayments up to $25,936 since May 2022

$1,000,000: $162 per month up to $6,216 from $6,054; annual repayments up to $28,476 since May 2022

Monthly repayment increases based on Commonwealth Bank floating rate rising to 6.34 percent, up 6.09 percent to reflect Reserve Bank cash interest rising to 4.1 percent, up 3 .85 percent. Annual installments for a 30-year loan compared to the increase in June with early May 2022, when the RBA spot rate was 0.1 percent and the floating rate was 2.29 percent

“The risk is a rate hike of 25 basis points earlier in July. And there is also a risk of interest rate hikes of 25 basis points in both July and August, which would put the cash rate at 4.6 percent.”

RBA Governor Philip Lowe told a summit in Sydney on Wednesday that inflation is likely to remain higher than expected for longer.

“Service price inflation is proving persistent here and abroad, and recent data on inflation, wages and house prices have been higher than forecasts,” he said at the Morgan Stanley event.

Dr. Lowe also expressed concern about an 8.6 percent increase in the minimum wage on July 1, which encouraged other workers to negotiate larger wage increases.

“We are in a difficult position where society understandably wants to protect the lowest paid workers, but we need to ensure that higher inflation does not translate into higher pay outcomes for everyone,” he said.

“How much it adds to inflation results depends on how much it spreads to the rest of the labor market.”

But Treasurer Jim Chalmers, speaking after that speech, said it was unfair to blame the minimum wage increase for the latest rate hike.

“The rates went up yesterday, not because of the budget, not because people on the minimum wage are being overpaid,” he said.

“Ordinary working people in this country are already bearing the brunt of these rate hikes, they shouldn’t be to blame.”

Dr. Chalmers said the latest rate hike would make life harder for ordinary Australians.

“Frankly, it goes without saying that another rate hike yesterday will make life more difficult for people who are already under the pump,” he said Wednesday.

The Reserve Bank of Australia has raised interest rates by a further 25 basis points - the 12th increase in just over a year

The Reserve Bank of Australia has raised interest rates by a further 25 basis points – the 12th increase in just over a year

Gareth Aird, Commonwealth Bank's head of Australia's economy, said there was an outside chance that the RBA would hike rates in July and August, pushing the spot rate to 4.6 percent for the first time since November 2011. come.

Gareth Aird, Commonwealth Bank’s head of Australia’s economy, said there was an outside chance that the RBA would hike rates in July and August, pushing the spot rate to 4.6 percent for the first time since November 2011. come.

Dr. Chalmers said Wednesday’s official National Accounts numbers were not surprising.

“These are the kind of numbers we expected when it came to our budget projections because of that combination of global uncertainty, higher interest rates and also cost-of-living pressures,” he said.

The annual rate of gross domestic product has slowed to just 2.3 percent, a big drop from 3.1 percent a year ago when the RBA hiking cycle began.

Ms Mousina said economic activity is likely to weaken further as higher interest rates crush consumers expenditure, housing construction and business investment.

The latest 0.25 percentage point increase in the RBA means that a borrower with an average mortgage of $600,000 will pay an additional $97 each month.

Monthly repayments will rise to $3,730, up from $3,633, as a Commonwealth Bank variable rate for a borrower with a 20 percent down payment rose to 6.34 percent, up from 6.09 percent.

The average borrower will now pay $17,088 a year more than it did 13 months ago, when RBA cash rates were still at a record low of 0.1 percent and banks were offering mortgage rates with a “two” in front.

Monthly repayments are now 62 percent higher than at the beginning of May 2022, when they were $2,306.

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