Australia faces 'sharper, longer slowdown', economists warn, as fifth rate hike looms on Tuesday

Australia's economy is set for a 'sharper, longer slowdown', major bank economists say, as the Reserve Bank is forced to keep interest rates higher to rid the nation of persistent inflationary pressures. The RBA is widely expected to hit mortgage holders with a fifth rate hike on Tuesday.

A hike would push the cash rate to its highest since 2008, amid rising worries that the economy could even be tipped into recession.

Belinda Allen, the head of Australian economics at CBA, said the extended Middle East conflict, collapsing house prices and a more aggressive central bank would drive real GDP down to just 1% by the middle of next year, nearly half the previous estimate of 1.8%. Growth through 2027 would be barely stronger, at an estimated 1.1%, according to the updated projections.

Allen said she had expected to see 'signs of economic recovery' by the New Year, but now sees the economy 'bottoming deeper and later'. This more pessimistic outlook was 'mainly given oil has been a lot higher than we had been expecting', she said.

Most people thought the Middle East conflict would have been resolved by now and oil prices looking more normal, but that has not happened. Brent crude, the global oil price benchmark, has surged from about US$72 a barrel in early July to back above US$110 in recent days, as the conflict broadens and hopes for a near-term peace deal have all but disappeared.

The gloomier outlook comes after Treasurer Jim Chalmers last month warned the December mid-year budget update would show a more pessimistic economic picture. Analysts at NAB have also revealed a major downgrade to their forecasts.

Gareth Spence, NAB's head of Australian economics, said 'unemployment might need to rise higher than we thought' in order to get inflation back under control. He forecast the key jobless measure would need to rise from 4.7% to as high as 5.4% by the end of next year. The CBA forecast was more optimistic, seeing unemployment peak at 5.1% over the same timeframe.

Spence said the economy would grow below trend over 2027 and 2028, echoing the forecast of just 1% growth next year. As union leaders protested against the anticipated rate hike in front of the RBA's offices in Sydney on Monday morning, Spence said the risk was that the central bank would have to hike again.

The deteriorating outlook comes as new data showed Australia's property slump remained on track to be one of the deepest on record. Shane Oliver, AMP's chief economist, said home prices could fall by as much as 15% before levelling off late next year, with Sydney property values already down by 10% from their recent peak.

A weakening property market will also weigh on homebuilding, Oliver said, adding to the multiplying pressures on the economy. While an economic contraction was not his 'base case', he warned there was a 'significant and rising' risk of recession, the chance of which would rise to as high as 45% should the RBA hike as expected on Tuesday.