Interest rates will stay low in 2022 as real wages fall: economists

Australia’s leading forecasters expect the Reserve Bank to resist pressure to raise interest rates all year, despite rising interest rates overseas, much higher inflation, rising unemployment plummeting and prices for financial market traders in two increases over the next six months.

The 24-person forecasting panel assembled by The Conversation also predicts:

  • Lower economic growth
  • Much weaker house price growth
  • Almost no growth in the Australian stock market
  • Little or no further advances in unemployment
  • Wage growth so weak that real wages fall.

Two thirds of forecast panel expect the Reserve Bank to leave rates ultra low until at least the first quarter of 2023, when it has a better reading of price, wage and labor market pressures.

Investors are betting on a different outcome.

Before the first meeting of the Reserve Bank Board of Directors for the year Tuesdaythe securities industry expects the Reserve Bank cash rate to rise from its all-time low of 0.10% to 0.25% by Junefollowed by an increase to 0.5% in August, and two more increases to 1.0% by Christmas.

If that happened, it would leave mortgage rates higher than they were before COVID and before two years of ultra-low interest rates sent home prices up 25%.

the bank of england increased its cash rate from 0.1% to 0.25% in December and the Reserve Bank of New Zealand raised its key rate in October and November to 0.75%. A 40-year peak in inflation should force the US Federal Reserve to raise rates in March.

But China went the other way, lowering rates and pleading with the rest of the world not to “Slam the brakes”.

Overall no rate hike all year

RBA Governor Philip Lowe will address the National Press Club on Wednesday. Photo: AAP

Now in his fourth year, the Conversation survey draws on the expertise of leading forecasters from 18 universities and financial institutions, including economic modellers, former Treasury, OECD and Reserve Bank officials, and a former board member. administration of the Reserve Bank. The panel was interviewed on January 20.

Eight of the panelists predict that the Reserve Bank will start raising its key rate this year. One, former OECD official Adrian Blundell-Wignall, expects the bank to start raising in March, ahead of the federal election.

But the majority of respondents point to the bank’s goal of achieving average inflation.sustainably within» its target range of 2-3% over time, noting that inflation has been well below this range for most of the past five years.

Governor Philip Lowe will set out his thoughts after the Reserve Bank’s first board meeting of the year in an address to the national press club Wednesday.

The panel expects him to suggest that he will have to see more than a short-lived burst of higher inflation before raising rates.

The panel’s median (average) forecast is for rate hikes to begin in April 2023. Three panelists, including Peter Tulip, a former research director at the bank, expect no rate hikes until February 2024.

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Inflation is not yet a problem

Although inflation hit a four-decade high of 7% in the United States and Australia’s headline inflation rate hit 3.5%, the so-called “underlying inflation ratetargeted by the Reserve Bank has yet to reach the top of the bank’s 2-3% target range.

The average panel forecast is that it will not reach it in 2022 or 2023, and that it will decrease in 2023.

Real wages down

But inflation should be high enough to drive down real wages, perhaps for two consecutive years – a first in the 25-year history of the wage price index.

In 2022, the average panel forecast is for wage growth of just 2.7% against core inflation of 2.9%, pushing down real wages (purchasing power) by 0.2% .

The panel expects wage growth to not stay ahead of price growth in the coming year, despite historically low unemployment rates and labor shortages.

In 2023, he expects wage growth to do no better than core inflation at 2.8%.

GDP growth plummets

Economic growth is expected to collapse. The panel expects the December 2021 rebound in state lockdowns to be reported on March 2, followed by a March quarter impacted by something akin to “voluntary lockdowns” as Australians restrict movements in response to Omicron.

Even if immigration and freedom of movement return, the panel expects economic growth to return to 2.5%, which is about where it was before COVID and well below the 3 to 4% common in the 1990s and early 2000s.

Panelists pointed to “increasing social and political discord” and falling demand from China, as well as “the absence of any policies designed to lift productivity growth above the dismal rates of pre-COVID” as brakes on growth, and identified government spending as one of the few sustainers.

The panel expects China’s economic growth to fall below US economic growth for the first time since the 1970s.

Mei Dong of the University of Melbourne said China’s growth will be hurt by lower working-age population growth, lower labor force participation, significantly slower growth in productivity and a decision by the Chinese authorities not to emphasize GDP growth as an objective.

Spending curbed

The broadest measure of overall living standards, real net national disposable income per capita, is projected to grow more strongly than real wages in 2022, reflecting growth in other sources of income, including corporate profits.

Consumer spending is expected to rise 3.7% in real terms, although nowhere near as strong as it would if the increase in savings during the COVID pandemic were completely undone.

Household savings soared to an all-time high of 23.6% of income in mid-2020 amid COVID concerns, fell to a still-high 11.8% in mid-2021 after easing restrictions, then shot up again to 19.8% as Delta moved in.

The ratio is expected to remain at a high 12% through 2022, well above the few % common in the decades leading up to COVID, as households cling rather than spend their incomes, uncertain about the future.

In December, Treasurer Josh Frydenberg spoke of the exceptionally high savings rate as a source of future spending, saying it was “a lot of money that has been accumulated.” Panel forecasts suggest the accumulation will continue.

The panel expects non-mining business investment to rise sharply through 2022, albeit in response to fiscal measures rather than what economist Stephen Anthony describes as structural drivers going down. ‘other way.

Panelist Mark Crosby said investment is expected to slow towards the end of 2022 as the prospect of higher interest rates weighs on the construction industry.

Unemployment with a ‘4’, but not a ‘3’

Few panelists expect Australia’s unemployment rate to fall much below its current level 4.2% in the next two years, despite what former ANZ economist Warren Hogan describes as the greatest demand for labor Australia has ever seen.

He says the problem is that the skills employers are looking for do not match those of job seekers and workers who are likely to become available in the coming years.

Janine Dixon says companies are putting more people on their payroll to cover sick leave and isolation leave, making it likely there has been an increase in underemployment.

In releasing the December budget update, Treasurer Frydenberg predicted “the addition of approximately one million jobs” between October 2021 and mid-2025.

It’s a projection broadly endorsed by the panel, albeit mainly because they think that’s what population growth is likely to produce.

Mark Crosby described it as a “pretty ordinary result given the rate of employment growth seen before the pandemic”. Much would depend on migration. The more migrants there are, the more jobs there are.

Weaker house price growth

After a year in which national property prices soared 22 percentthe panel expects calmer growth of 6.5% in Sydney and 6.1% in Melbourne.

Katrina Ell of Moody’s Analytics believes the market has already peaked. She says mortgage rates will rise this year whether or not the Reserve Bank raises official rates, and measures put in place by the Prudential Regulation Authority are beginning to dampen investor interest.

Warren Hogan disagrees, seeing investors drive the next phase of the housing market. He says upper-middle to high-income households withdrawn will try to protect their wealth against rising inflation by buying real estate.

Markets at half mast

Overall, the panel expects the exchange rate to remain broadly where it stands at 71 to 72 US cents in 2022, and expects the ASX200 stock price index to end the year is about where it started, after climbing 13% in 2021 and sinking 9% in January.

They expect the iron ore price to rise from US$137 ($196) per ton to US$98 ($140).

The panel:

This Conversation survey is the first not to include the opinions of Griffith University professor and former IMF and Treasury official Tony Makin, who died suddenly in November, aged 66. His contributions were greatly appreciated.The conversation

Peter MartinVisitor, Crawford School of Public Policy, Australian National University

This article is republished from The conversation under Creative Commons license. Read it original article.

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