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‘Deep’ recession still coming, despite signs of resilience: Deloitte
Despite surprising resilience continuing to push back fears of a global recession, a significant slowdown remains highly likely as the effects of higher interest rates continue to play out, warns Deloitte, which forecasts a “deep per capita recession” that will see economic activity in Australia stall.
Persistently healthy labour data and a rebound in equity markets have contributed to a shift in tone among economists, who now see greater odds that the Reserve Bank of Australia and the domestic economy will manage the elusive “soft landing” that has been the central bank’s stretch goal throughout its inflation-fighting campaign.
But Deloitte Access Economics partner Stephen Smith, in the company’s Business Outlook report, says these promising signs do not change the narrative and that “global economic growth is still likely to be significantly slower in 2023 than in the previous calendar year as tighter monetary policy continues to hinder activity”.
The Australian economic outlook has also further softened, with the RBA increasing interest rates more than markets had expected; Deloitte expects the domestic economy to grow by just 0.9 per cent in the 2023-4 financial year, compared with an average annual rate of 2.4 per cent over the previous decade.
“The outlook is much worse when removing the effect of population growth,” he says. “A deep per capita recession is expected over the next two years. In 2025, economic activity per person in Australia is expected to be around the same as in 2021, indicating that prosperity has stalled.”
In the report, Smith also stressed that the full effect of the 400 basis points of tightening the RBA has already carried out is still to be felt. “Deloitte Access Economics remains concerned that too much has already been done by the RBA, given that most of the inflation in the system stems from supply side issues – a fact confirmed in recent research by the RBA itself – and is therefore largely immune from monetary policy.”
Flagging productivity and soft business investment also reflect the “broader challenges facing the Australian economy”, Smith says. “Price growth which is primarily caused by issues of supply – be it global shipping costs and import prices, the costs of a disorderly energy transition, or higher rents and house prices because of a handbrake on housing construction – cannot be readily solved by higher interest rates.”
Moreover, recent economic data suggests monetary policy may already be set too tight, Smith says, adding that the RBA was right to pause on increases at its July meeting. He also noted that the bank, in the statement announcing the pause, removed the reference to keeping the economy on an “even keel” that had been in the past 10 statements.
“The current disinflation impulse reverberating through developed economies is neither a surprise nor likely to be short-lived, and will flow through to lower headline inflation in Australia over coming quarters,” he says.
