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The Guardian - AU
The Guardian - AU
Business
Peter Hannam

Economists predict slowdown for Australian economy as interest rates continue to rise

coal operations in the port of newcastle
Coal exports alone topped $100bn in 2021-22, part of a surge in fossil fuel exports that helped continue Australia’s economic growth despite rising interest rates. Photograph: William West/AFP/Getty Images

Booming commodity prices have provided the economy with extra propulsion even as the Reserve Bank “feathers the brakes” to reduce the risk of higher inflation taking hold, economists say.

GDP figures for the June quarter to be released by the Australian Bureau of Statistics (ABS) on Wednesday are expected to show soaring exports helped the nation maintain the growth momentum of the previous three months, even as the RBA started lifting its key interest rate for the first time since 2010.

The central bank extended the cycle on Tuesday, lifting the official cash rate by another half-percentage point to 2.35%. The 225 basis-point increase since May is its sharpest increase since 1994.

Economists expect the size and pace of rises to begin tapering off, not least because higher borrowing costs take a couple of months to have an impact on households and businesses.

The RBA decision and accompanying statement by its governor, Philip Lowe, were “consistent with a scaling back to 25 basis point moves from October but maintaining that sequence for a number of consecutive meetings out to February next year with a peak terminal rate of 3.35%”, Westpac’s chief economist, Bill Evans, said.

However, Wednesday’s GDP growth figures will probably point to the beginning of a slowdown in the economy, which should start to take some of the pressure off price rises.

“There is a slowdown, if not here already, then it’s certainly coming,” KPMG’s chief economist, Brendan Rynne, said. “And that slowdown’s most likely going to accelerate as the RBA continues to feather the brakes with regard to lifting the cash rate back up from the extraordinarily low levels that we’ve had during more recent times.”

Rynne predicts the economy will post a GDP growth rate of just above 1% for the June quarter alone, and 3.6-3.7% year-on-year. Rising export volumes and higher prices for those exports will add about 1 percentage point of growth in the quarter.

“It’s huge,” Rynne said. “So we’ve had a kick in exports and we’ve also had imports reduced.”

Australia recorded a 13th consecutive current account surplus in the June quarter, the longest such streak in history, the ABS said on Tuesday.

The terms of trade – a gauge that compares the price of Australia’s exports with imports – also rose during the quarter, advancing 4.6% to a record high.

Coal exports alone topped $100bn in 2021-22 for the first time, ABS said.

Some of the boost from fossil fuel exports is carrying into the September quarter, with Bloomberg reporting that spot prices for thermal coal reached $US436.71 ($A644) on Friday, a record in Asia, as power plants scramble to secure supplies amid global energy disruptions following Russia’s invasion of Ukraine six months ago.

The farm sector is also forecasting another good year ahead, even with the likelihood of wetter-than-usual weather from the third La Niña event in as many years.

The Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) predicts farm output will reach $81.8bn in gross value and a record $70.3bn in exports – or about 50% more than 10 years ago, after adjusting for inflation.

“Winter crop prospects in Australia are looking very promising at the beginning of spring – we’re forecasting a 55.5m tonne harvest,” Jared Greenville, the executive director of ABARES, said.

The effect on higher borrowing costs, though, is expected to sap some buoyancy in the economy. A drop in inventories and weaker-than-expected government spending in the June quarter also took some of the gloss from the export sector, Rynne said.

While retail spending has held up, consumption may start to slow, particularly as higher interest rates bite.

Home values – now falling at the fastest pace in decades – are dimming the sense of wealth for those that own properties, Rynne said. Rising borrowing costs also mean investors will be trying to push through higher rents that, in turn, will divert money from tenants that might otherwise have ended up in shops.

“You’re also getting global headwinds, as it’s not only Australia that’s seeing their interest rates continuing to rise,” Rynne said. He predicts the central bank will lift the cash rate another 25 basis points to 2.60% in October, before taking a break.

Gareth Aird, the chief economist at the Commonwealth Bank – the country’s biggest issuer of mortgages – concurs.

“We think that provided the RBA pauses for at least a few months in their tightening cycle when the cash rate is 2.60% or 2.85%, the data will indicate that there is no need to continue to take the policy rate higher,” Aird said.

“Indeed, taking the cash rate higher would likely generate a hard landing in the economy.”

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