‘Sharper, longer slowdown’ predicted for economy as fifth interest rate hike looms

Australia's economy is facing a "sharper, longer slowdown," according to major bank economists. The Reserve Bank is expected to raise interest rates for a fifth time on Tuesday, pushing the cash rate to its highest level since 2008. This move comes amid mounting concerns that the economy could slip into recession. Belinda Allen, head of Australian economics at CBA, predicts real GDP will plummet to just 1% by mid-2024, roughly half the previous estimate of 1.8%.

Growth through 2027 is expected to be only slightly better at 1.1%. Allen had anticipated signs of economic recovery by the New Year, but now warns the economy will "bottom deeper and later." The pessimistic outlook is largely due to oil prices being higher than anticipated, with Brent crude surging from $72 a barrel in early July to over $110 in recent days.

This price surge is driven by the ongoing conflict in the Middle East and the lack of a near-term resolution. Unemployment may need to rise higher than previously expected to control inflation, with the key jobless measure potentially reaching 5.4% by the end of next year. Analysts at NAB have also downgraded their economic forecasts, foreseeing a significant risk of recession, potentially as high as 45%, if the RBA hikes interest rates as anticipated.

The property market slump is expected to be one of the deepest on record, with home prices potentially falling by up to 15% before stabilizing late next year. This steep decline in property values could have a substantial impact on the economy, as homeowners pull back on spending, a phenomenon known as the "wealth effect."