RBA rate rises spark consumer recession fears, Deloitte says 

Australia is heading for a ‘consumer recession’ after two unnecessary rate hikes by the Reserve Bank, one of Australia’s largest consulting firms has warned.

The grim forecast comes ahead minutes of the RBA’s April meeting, where the board chose to pause after 10 rate hikes in a row.

The Deloitte Access Economics report said the last 50 basis points of increases were “unnecessary” and had only served to dampen Australia’s growth prospects.

The report’s lead author and partner at the firm, Stephen Smith, said household spending would end the year lower than it started as the cost of paying off a mortgage has ballooned.

Mr Smith said most Australians could cope with a cash interest rate of 3.6 per cent, but many could not, with the cost of paying off an average $600,000 mortgage rising by more than $14,000 a year once all interest rate hikes have been implemented.

“But that’s just the average, and there are plenty of mortgagees on either side of those numbers,” he added.

Under these circumstances, he said, at least 300,000 households already have more money flowing out through higher mortgage payments and general spending than is coming in through wages and other sources of income.

“That should shock us all,” Smith said, predicting a “consumer recession.”

He also said tenants were under pressure from skyrocketing prices and this cohort would only be squeezed more tightly by predictions that new housing construction would barely keep pace with population growth.

“This is a matter of supply and demand, but private housing investment is expected to decline rather than increase through 2023, before recovering only modestly in 2024,” he said.

‘It is expected that the construction of significantly fewer houses and apartments will start compared to previous years

Deloitte Access Economics expects construction to start in 2023 on the fewest homes in more than a decade and nearly 70,000 below the level that started in 2021.

“Based on these numbers, new housing supply would barely keep pace with population growth, let alone alleviate the critical undersupply.”

Against the backdrop of household pain, a lull in housing construction and a shaky global environment, the company’s economists have revised their forecasts for economic growth to 1.5 percent in 2023 and 1.2 percent in 2024.

This will be the weakest growth outside of the pandemic and recession of the early 1990s.

Further rate hikes are not ruled out, and the minutes of the RBA’s April spot rate decision will hopefully hold some clues about the bank’s future decisions.

While the minutes are unlikely to add much to subsequent public appearances by RBA board members, they may offer some insight into how the central bank will interpret incoming data, including the quarterly consumer price index expected next week.

RBA Governor Phillip Lowe has overseen 10 rapid rate hikes to fight runaway inflation

Deloitte made a gloomy forecast for Australia’s housing shortage, predicting construction to lag far behind demand

RBA board member Ian Harper admitted last week that the bank had done a “terrible job” in the wake of the Covid pandemic as it struggled to contain inflation but not strangle the economy.

“Both things made us extremely cautious. In hindsight, we were overly cautious with how we set interest rates at the time,” he said, according to The Australian.

“In hindsight… it looks like we did a terrible job.

“When you look back, you often see things much more clearly than you did back then.”

Deputy Governor Michele Bullock also admitted that the RBA’s crucial rate messages were “garbled” after RBA Governor Philip Lowe insisted in 2021 that the bank would not raise cash rates until “2024 at the earliest.”

“I will accept… that the message has become illegible. People cling to a date… and even as we raise interest rates, they still want us to set a date for us to stop,” she said.

“We should have resisted … a little more there.”