Skyrocketing mortgages, 7.1 percent inflation and a risk of recession: how economists see the coming year

Homeowners will face mortgage rates of nearly 5.5 percent in just over a year, according to a survey of 22 leading Australian economists.

The Conversation’s 2022-23 forecasting survey predicts a rise in the Reserve Bank’s spot interest rate from its current 0.85 percent to a peak of 3.1 percent in August next year.

When passed in full, the series of rate increases would increase the cost of payments on a $500,000 variable mortgage by about $600 a month and the cost of payments on an $800,000 mortgage by about $1,000 a month.

House prices in Sydney and Melbourne are expected to fall by 6-7 percent.

The panel believes the Reserve Bank will push its cash interest rate to its highest point since the 2010-2012 resource boom in an effort to contain inflation. of the year.

Panelists estimated the risk of overreaction by authorities triggering a recession in the United States at a 40 percent chance and in Australia at a lower 20 percent chance.

Now entering its fourth year, The Conversation’s research draws on the expertise of leading forecasters from 20 Australian universities and financial institutions, including economic modellers, former officials of the Treasury Department, the International Monetary Fund and the Reserve Bank, and a former member of the Reserve Bank board.

Inflation

The panel expects the next inflation figure to be released later this month, showing that prices rose 6.7 percent in the year to June – the highest since the early 1990s.

Panelist Saul Eslake says it’s hard to be sure about when inflation will peak without being sure about when and how the conflict in Ukraine will end, though he says it’s hard to see energy prices rise higher, and there are is some evidence that COVID-related supply disruptions are beginning to ease.

On balance, the panel expects inflation to peak at 7.1 percent by the end of this year and fall next year.

Interest is rising

The panel expects the equivalent of five 0.25-point hikes in the Reserve Bank’s spot interest rates over the next six months, and just under two more 0.25-point hikes in the six months to follow.

On balance, the panel expects the spot rate to stop rising once it hits 3.1 percent in August, but some members expect much stronger increases.

Warwick Mckibbin, a former Reserve Bank board member, expects a cash interest rate of 4.5 percent (implying a mortgage rate of 6.75 percent) by March, which he says is less than required.

He says spot interest rates must rise above the 3.5 percent that would normally be considered neutral, and stay there for a sustained period of time to bring inflation back to the Reserve Bank’s target.

Warren Hogan, a former Commonwealth Treasury and Financial Markets economist, sees interest rates rising for another five years, although his forecast is for four years.

RBC Capital Markets’ economics chief Su-Lin Ong believes this will not be necessary to cool the economy as the expiration of the ultra-cheap three-year fixed-rate mortgages closed during COVID will produce a “market-induced tightening” .

Recession risk in the US and Australia

The panel believes that the United States is at much greater risk than Australia of a miscalculation in which tariffs are pushed so high to contain inflation that they trigger a recession.

The US economy has already fallen in the first three months of this year, and the panel expects it to end the year just 2.2 percent bigger than when it started. The panel expects an unusually low economic growth of 2.6 percent in China.

In the United States, the task of determining the beginning and end of recessions has been assigned to the National Bureau of Economic Research’s business dating commission.

The panel believes there is a 40 percent chance it will call a recession in the next two years, with the most likely starting in March 2023.

The panel assigns a lower 20 percent chance of a recession in Australia (usually defined as two consecutive quarters of negative economic growth) and believes the most likely start date is August 2023.

Economic growth

In the absence of a recession, the panel expects economic growth to slow in line with the March budget forecast of a year-on-year growth of 4.25 percent in 2021-22 to 2.5 percent in the coming months. five years.

standard of living

The substantial increase in wage growth that the panel expects from 2.4 percent in the year to March to 3.6 percent in June next year will not be nearly enough to prevent a decline in real wages.

Even if inflation fell to 4.8 percent by then, as predicted, real wages would fall another 1.2 percent.

Weighing further increases in wage growth will be a projected rise in unemployment, from 3.9 percent to 4.2 percent.

ANZ chief economist Richard Yetsenga says Australia’s reopening to skilled migrants, temporary visa holders, students and backpackers will increase the supply of workers, but should also boost already very strong consumer spending, limiting a rise in unemployment.

The panel expects outrageous real household spending growth of 4.5 percent in 2022-23, spurred by what Jo Masters, chief economist at Barrenjoey Capital, describes as higher household savings, coupled with ongoing fixed-rate mortgages and the low and low middle-income tax offset payments due to July bills.

The broadest measure of living standards, real net disposable income per capita, should continue to rise, albeit modestly.

House prices

The panel expects mortgage rate declines in house prices to reach 6-7 percent in Sydney and Melbourne over the next year.

Julie Toth of Swinburne University and Nous Group expects the biggest impact in low- and middle-income suburbs, where buyers are more vulnerable to mortgage hikes.

markets

The panel nevertheless expects solid non-mining investment growth of 6.4 percent (and mining investment of 7.6 percent), and iron ore prices above $100 an ounce, but down from the current $130 to $108.

It expects the Australian stock market to close the fiscal year 2 percent lower.

After a year in which the 10-year bond yield, which determines the government’s borrowing costs, rose from 1.5 percent to 3.7 percent, panelists expect only a small further increase in 2022-23 to 3.9 percent.

After shifting from 75 cents to 69 cents, they expect the Australian dollar to rise modestly to 72 cents in 2022-23, putting downward pressure on inflation.

Peter Martin is a visiting fellow at the Crawford School of Public Policy, Australian National University. This article originally appeared on The Conversation.

Leave a Comment