NAB economist examines global growth forecast cut
Despite a downgrade to the global growth forecast, prospects for the Australian economy remain strong, with a recession not yet firmly embedded in economists’ forecasts.
The IMF on Tuesday downgraded its global growth forecast for 2023 to 2.7%: 0.2 percentage points lower than its July forecast.
It marks the first time since 2000 that it has predicted global economic growth of under 3% for the following year. The IMF anticipates that more than a third of the global economy will contract this year or next, and that the US, the European Union and China “would continue to stall”.
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“This is the weakest growth profile since 2001 except for the global financial crisis and the acute phase of the COVID-19 pandemic,” the IMF said.
According to the IMF, the worst is yet to come, and “for many people 2023 will feel like a recession”.
The IMF has also downgraded its expectations for Australia’s economy, tipping it to grow by 1.9% through 2023, with inflation to average 4.8% next year.
A recession can be technically defined as two quarters of negative growth. More broadly, the RBA defines a recession as occurring when there is a “period of reduced output and a significant increase in the unemployment rate”.
NAB chief economist Alan Oster told MPA a recession was “not yet” part of the bank’s forecast.
There is “no change” to NAB’s GDP forecast released in September, Oster told MPA on Wednesday. The big four bank is forecasting GDP growth of around 1.6% over 2023, and around 1.7% over 2024 (formerly a slightly higher 1.8%).
The rate of unemployment, currently 3.5% (ABS, August 2022), is forecast to rise to 4.3% over 2024.
The official cash rate has risen 250-basis points this year so far, including a smaller, 25-basis point hike in October. NAB forecasts show the official cash rate, currently 2.60%, will rise to 3.1% by the end of 2022.
Key risks facing the Australian economy right now are the global outlook, and that the RBA pushes the official cash rate too high in an ongoing bid to rein in inflation, Oster said.
Despite headwinds in the global economy, Oster noted that the IMF forecasts global growth of 2.7% for 2023: above NAB’s forecast of 2.3%.
“On the positive side, the economy (as of the end of September) is still very robust and wage pressures are still reasonable - unlike the USA [for example],” Oster said.
“So, price expectations are well anchored still. [The] RBA also seems more intent on not crashing the economy in pursuit of inflation.”
In a statement released on Tuesday, Australian federal Treasurer Jim Chalmers said the prospects of a recession in some of the major economies had changed from “possible” to “probable”.
The “deteriorating global situation” is to form the backdrop of the Budget, to be announced on October 25, he said.
As the world braces for a third downturn, Chalmers said this one would be different to those of the last decade and a half, which included the GFC and a “health shock” that mostly became a supply issue.
“This one is an inflation shock and the risk here is a hard landing around the world brought about by the blunt and brutal but in some ways necessary tightening of monetary policy that we're seeing, particularly in the big, advanced economies,” Chalmers said.
But while it was clear the global economy was deteriorating, the Sydney Morning Herald reported Chalmers said Australia was in a strong position to defy a local recession, just before he headed to Washington for the annual meeting of the IMF along with central bankers and finance ministers.
“The budget that I hand down in two weeks’ time won’t have an expectation or a forecast that the Australian economy falls into recession,” Chalmers said.
“So, price expectations are well anchored still. [The] RBA also seems more intent on not crashing the economy in pursuit of inflation.”
The six-monthly RBA Financial Stability Review, released in October identifies that risks to global financial stability have increased. Most central banks have raised rates rapidly in response to inflationary pressures, along with material downgrades to the global economic outlook.
Financial asset prices had declined substantially, and volatility in financial markets had increased, the central bank said. Liquidity conditions had deteriorated in government bond markets.
Due to uncertainty around the outlook for inflation, growth and policy rates alongside heightened geopolitical tensions, global financial conditions could tighten further, the RBA said in the report.
On a global scale, longer-term threats include cyber risk, a worsening geo-political environment, climate-related financial vulnerabilities, and emerging risks associated with crypto-assets.
In most advanced economies, mortgage rates were typically fixed for five years or longer, meaning a relatively small share of borrowers are exposed to higher debt servicing costs.
As fixed rate mortgages are less common or have shorter average terms, borrowers in Australia, New Zealand and some European countries would be exposed to higher rates sooner, the RBA said.
