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Reserve Bank wary of cautious consumers amid falling house prices, as global economy sours

The Reserve Bank has slashed its forecasts for economic growth as rate rises, house price falls and a souring global economy weigh on Australia’s outlook.

The bank has dramatically scaled back its forecasts for household consumption, which accounts for about 60 per cent of Australia’s economy.

“Higher consumer prices, rising interest rates and declining housing prices are expected to weigh on growth in private spending, at the same time as growth in public demand slows,” the bank noted in its latest Statement on Monetary Policy.

The bank slashed its consumption forecast for the middle of next year from 4.4 per cent to 2.8 per cent, echoing the results of surveys that show consumer sentiment approaching recessionary levels.

Higher interest rates are expected to be a major factor behind tightened belts, with the RBA basing its forecasts on an assumption that its cash rate would hit 3 per cent by the end of the year – up from 1.85 per cent currently – before falling back a little by the end of 2024.

It is important to note that this is not an RBA forecast for the cash rate, but an assumption based on market pricing and economist forecasts.

The outlook for Australia’s gross domestic product (GDP) has been cut by a full percentage point from around 4.2 per cent for December 2022 to 3.2 per cent.

Those cuts continue for the rest of the forecasting period, with the economy expected to grow just 1.75 per cent for the next two years.

Falling house prices, combined with the previous construction boom inspired by ultra-low interest rates and the previous government’s HomeBuilder grant, will result in dwelling investment falling sharply (-4.8 per cent) over 2024.

State and federal governments are also not expected to provide any assistance, with expectations that public spending will shrink next year.

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Reserve Bank hikes interest rates for fourth consecutive month(Rhiana Witson)

Real wages to keep shrinking

Despite the slowdown in GDP growth, the RBA expects the jobs market to remain strong.

It is now predicting that unemployment will bottom out at about 3.25 per cent later this year before gradually creeping back up to 4 per cent by the end of 2024, as economic growth slows and migration flows start to ease some labor shortages.

Despite this leading to a modest pick-up in wage rises to about 3.5 per cent next year, the Reserve Bank still expects real wages to fall for at least the next year – that is, prices will keep rising faster than pay packets.

After peaking at 7.75 per cent by the end of this year, inflation is still expected to be about 6.2 per cent by the middle of next year, and 4.3 per cent at the end of 2023.

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