Bendigo Bank’s December Economic Update
With the Reserve Bank gifting Australian homeowners a summer holiday rate hike reprieve last week, another increase in 2024 can’t be ruled out just yet.
In his final economic update for the year, Bendigo Bank Chief Economic, David Robertson says that there are clear signs the economy is slowing and Australians should be preparing for a challenging period ahead.
“As 2024 approaches with a welcome pause in RBA rate hikes, and clear signs that the economy is slowing, there’s no doubt we’re in for a challenging period ahead,” Mr Robertson said.
“The December RBA ‘no change’ policy decision and associated comments were as expected, and maintained the tightening bias, but did add weight to a ‘rates on hold’ scenario - potentially for all of 2024. Another hike to 4.6 percent can’t yet be ruled out and will be dependent on quarterly CPI data out in late January and then in late April, but equally rate cuts will need a lot of progress with inflation to materialise.
“The latest GDP numbers show the economy is quickly decelerating, with real GDP only rising 0.2 percent in the third quarter. Household consumption and savings rates continued to slow, and only public demand and capital investment kept the economy growing last quarter.
“With the November rate hike and the likely easing in population growth next year, the risk of a technical recession is still real,” Mr Robertson said.
“Fortunately, the resilience in labour markets continues to insulate households from the slowdown that the rate hikes are aiming to achieve (to reduce inflationary pressures), but next year the unemployment rate is expected to steadily rise. The updated RBA forecast is for unemployment to only reach 4.2 percent next year, but as detailed on our business insights website, our forecasts show a sharper rise to above 4.5 percent by mid-year.
“Further economic data to be released in coming months is expected to show a similar theme - higher interest rates on top of the cost-of-living crisis slowing the economy down, suggesting further RBA hikes may be unnecessary. Meanwhile a range of other central banks (including the US Federal Reserve and the European Central Bank) may well be cutting their rates by mid-2024.
“The key for the RBA here in Australia is how quickly inflationary risks subside,” Mr Robertson said.
“For the RBA to cut rates, they will need to be convinced the target of 2.5 percent is both achievable and imminent. Goods inflation is likely to be around that target relatively soon, but core services inflation may need all of next year to normalise.
“The contrast between the likely timing of US rate cuts versus the RBA here in Australia is flowing through to currency markets, with the Aussie Dollar reaching almost 67 cents, in line with USD weakness.
"Elsewhere equity markets have recovered on the prospect of US rate cuts, and the price of gold has just reached a fresh record high, but market confidence remains fragile.
“In summary, 2024 is likely to be a year where our economy slows further under the weight of higher interest rates, setting the scene for rate cuts early in 2025, but that timing dependent on CPI continuing to moderate and core inflation falling below 3 percent,” Mr Robertson concluded.
To watch David Robertson’s December Economic Update, please follow this link: Bendigo Bank Economic Update with David Robertson | December 2023.