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Banks (Finance)

Australia's Economic Output Per Person to Shrink in Second Half of 2023, Reserve Bank Warns

Strategic Insights

— 2 min read

A new report from the Reserve Bank of Australia (RBA) warns that the country's economic output per person is forecast to shrink in the second half of 2023 due to higher interest rates and rising cost of living. Despite steady wage increases at an annual rate of 3.7%, households are expected to feel the pinch as inflation pressures ease but some components of the consumer price index, such as rent, are predicted to rise.

Key Takeaways:

  • The RBA forecasts economic growth to slow from 1.6% at the end of June to 0.9% by the end of 2023, with per-capita gross domestic product (GDP) shrinking due to a population growth of about 2%.
  • Wage increases are expected to remain steady at an annual rate of 3.7% across the first six months of this year, and will quicken modestly to about 4.1% by the year's end.
  • Rent inflation is forecast to increase further over the period ahead as rental vacancy rates remain low, and as housing supply responds with a lag to population growth.
  • The unemployment rate is forecast to creep from 3.5% in June to 3.9% by the end of 2023 and 4.2% in a year's time, before stabilizing at around 4.5% by the end of 2025.
  • Underlying inflation is expected to glide from 5.9% in the June quarter to 2.9% by the middle of 2025, finally falling back within the RBA's 2%-3% target range.
  • The RBA's cash rate is expected to peak at around 4.25% and then ease to 3.25% only by the end of 2025, a level that may disappoint households hoping for a bigger reduction.
  • The RBA has listed several uncertainties to the outlook, including China's "uneven recovery" from the Covid restrictions, household consumption subject to competing forces, and inflation falling faster than anticipated as a result of many central banks tightening monetary policy at the same time.

Statistics:

  • Economic growth: 1.6% (at the end of June) → 0.9% (by the end of 2023)
  • Population growth: 2% (2023)
  • Per-capita GDP: forecast to shrink due to population growth
  • Wage increases: 3.7% (first six months of this year) → 4.1% (by the year's end)
  • Rent inflation: forecast to increase further over the period ahead
  • Unemployment rate: 3.5% (June) → 3.9% (by the end of 2023) → 4.2% (in a year's time) → 4.5% (by the end of 2025)
  • Underlying inflation: 5.9% (June quarter) → 2.9% (by the middle of 2025)
  • RBA cash rate: expected to peak at 4.25% → ease to 3.25% by the end of 2025

Sources:

  • Reserve Bank of Australia, Quarterly Statement on Monetary Policy
  • Australian Securities Exchange (ASX)

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