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- Deloitte partner Stephen Smith said the Reserve Bank’s past two interest rate increases were unnecessary.
- A consumer recession is at least two quarters of household spending falling, but not the entire economy.
- Treasurer Jim Chalmers said global economic headwinds were increasing and conceded a slowdown domestically would put pressure on the jobs market.
Treasurer Jim Chalmers has been warned that the economy is on a knife-edge, as a forecast consumer recession centred on NSW and Victoria threatens to push up unemployment while hundreds of thousands of home buyers struggle with rising mortgage repayments.
As the key financial elements of Chalmers’ second federal budget are finalised this week, respected fiscal monitor Deloitte Access Economics issued the gloomiest outlook for the economy yet, saying the country faced its toughest non-COVID phase since the devastating recession of 1990-91.
The economy is on a knife-edge due to Reserve Bank interest rate rises, says Deloitte Access Economics.Credit: Luis Ascui
Deloitte partner Stephen Smith said on Monday that the Reserve Bank’s past two interest rate increases, which took the official cash rate to an 11-year high of 3.6 per cent, were unnecessary and would create real pain for households and the broader economy.
“A ‘consumer recession’ is now forecast in 2023, with household spending expected to finish the year below where it started,” he said.
“At a cash rate of 3.6 per cent, most Australians will be just fine. Many, however, will 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.”
A consumer recession is at least two quarters of household spending falling, but not the entire economy.
Deloitte is forecasting the economy to grow just 0.9 per cent in 2023-24. Three months ago, it was expecting growth of 1.4 per cent over the same period.
It downgraded its forecasts largely because of a collapse in household spending, which accounts for 60 per cent of economic activity. It is expecting no growth in household expenditure in the coming financial year.
NSW and Victoria, which make up the lion’s share of consumer spending, are expected to be hardest hit, but all states and territories are forecast to be affected.
Smith said that by the Reserve Bank’s own projections, about 15 per cent of people with variable mortgages would be spending more than they were earning by the end of the year.
Household spending accounts for 60 per cent of economic activity.Credit: James Davies
“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. That should shock all of us,” he said.
Nationally, the jobless rate in March was steady at 3.5 per cent with 72,000 full-time jobs created. But Deloitte is expecting unemployment to average 4.1 per cent next financial year and then 4.6 per cent in 2024-25.
KPMG was even more downbeat on Monday about the jobs market. While expecting the economy to expand by 1.2 per cent in the coming year, it is forecasting the jobless rate to be at 4 per cent by Christmas and 4.6 per cent by mid-2024.
The darkening outlook increases pressure on Chalmers who, in his October budget, forecast household spending to grow 1.25 per cent next financial year and the economy to grow by 1.5 per cent.
Treasurer Jim Chalmers says economic headwinds are worsening ahead of the budget.Credit: Rhett Wyman
The Treasurer, who has just returned from the United States for the spring session of International Monetary Fund and World Bank talks, said the final elements of the May 9 budget would be determined this week.
He said the global economic headwinds were increasing and conceded a slowdown domestically would put pressure on the jobs market.
“As we made clear in the forecasts in the October budget and as we will make clear again, Treasury and others anticipate an increase in the unemployment rate as the global economy slows and the interest rates rise,” he said.
In October, the government saved almost all of the upward revision in revenue caused by higher-than-expected commodity prices and lower unemployment. To the end of February, the budget deficit was $20 billion smaller than expected, because of stronger revenue flows.
Chalmers said that in next month’s budget he would save upward revenue forecasts but not to the same extent as in October, arguing the economy would need more support as it slowed.
More money is likely to flow into the energy, manufacturing and the care industries while at least $1.5 billion is expected to be spent on reducing energy bills for households.
Chalmers, who is expected to revise down the size of the forecast $44 billion deficit for 2023-24, said the government was focused on providing cost-of-living relief, reducing inflation pressures and repairing the budget.
“The best antidote to global economic uncertainty is responsible economic management here at
home,” he said.
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