Deloitte warns of recession as interest rate hikes push Australia’s economy to the brink
Deloitte says interest rate increases have driven Australia to its “weakest rate of economic growth” outside of COVID since the 1990s’ recession.
Consulting firm Deloitte Access Economics has criticised the Reserve Bank of Australia for increasing interest rates unnecessarily – pushing thousands of household budgets deep into the red and placing the economy on a “knife’s edge”.
In the March edition of its Business Outlook report, the nation’s fiscal monitor claims the two interest rate rises in February and March have left the nation facing the “weakest rate of economic growth” outside of the pandemic since the recession of the early 1990s.
A consumer recession is defined as at least two quarters of household spending falling, but not the entire economy.
Deloitte partner Stephen Smith said the hikes have brought the economy to the brink of a recession amid a global economic slowdown.
“The additional 50 basis points of increases earlier this year were unnecessary, and have prompted a further downgrade in Australia’s growth outlook,” he said.
“That downgrade is centred on our households, and a consumer recession is now forecast in 2023, with household spending expected to finish the year below where it started.”
The gloomy outlook is expected to be centred on New South Wales and Victoria, which make up the lion’s share of consumer spending.
Feeling the impact
Mr Smith said while many Australians could survive with the cash rate paused at 3.6%, there are more who would already be feeling the impact of rapidly rising rates.
“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,” he said.
“But that is just the average there are plenty of mortgage holders on either side of those numbers.”
Negative cash flow
Mr Smith also highlighted the RBA’s own modelling, which predicts 15% of variable rate owner-occupier mortgage holders will be in negative cash flow by the end of the year.
“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,” he said.
“That should shock all of us.”
Economic forecast
Deloitte is forecasting the Australian economy to grow 0.9% between now and 2024.
Just three months ago, it was expecting a growth of 1.4% over the same period.
The forecast was downgraded largely due to a collapse in household spending, which accounts for 60% of economic activity.
Additionally, the firm is expecting zero growth in household expenditure in the coming financial year.
Increasing pressure
The figures are expected to add to mounting pressure on Australian Treasurer Jim Chalmers whose October budget forecast household spending to grow 1.25% next financial year and the economy to expand by 1.5%.
Mr Chalmers is expected to revise down the size of the forecast $44 billion deficit for 2023-2024 and said the government was focused on providing cost-of-living relief, reducing inflation pressures and repairing the budget.
‘Terrible job’
Deloitte’s prediction comes just days after Reserve Bank officials admitted they “did a terrible job” of hitting the nation with 10 consecutive rate rises and failing to curb inflation.
Long-term board member Ian Harper conceded that after the pandemic hit, the bank struggled to balance the need to keep inflation at the 3% target and maintain stability in the financial system.
“Both of those things led us to be excessively cautious with how we set interest rates during that time,” he said.
“With the benefit of hindsight … it looks like we did a terrible job.”
The backlash to brutal rate rises has been so severe that in November, RBA Governor Philip Lowe apologised to Australians who borrowed under the belief they had more time up their sleeves before rate hikes kicked in.