Home / Economics / Soft landing harder to find as economy proves resilient to inflation

Signs of rising economic optimism in Australia don't change the narrative on the risk of recession, with chances remaining high for a deep downturn in Australia according to a new report.

A “deep per capita recession” is on the cards for the Australian economy according to professional services giant Deloitte, with a serious slowdown still highly likely despite continued signs of economic resilience in the face of peaking inflation and swollen interest rates.

The Reserve Bank’s chances of pulling off the fabled ‘soft landing’ in its efforts to curb inflation without sending the economy into recession grow slimmer, with unemployment persistently low and equity markets showing remarkable resilience.

Yet 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.”

Atchison’s Consultants principal Kevin Toohey says inflation isn’t coming down any time soon.

“We expect inflation volatility to remain elevated,” he tells The Inside Adviser. “The problem central banks fear is that the longer that supply-side and elastic-demand driven inflation has remained in the system, the greater the pressure it puts on sticky-priced items to feed a higher structural landing for medium-term prices.”

Toohey characterizes higher interest rates as a “very blunt instrument”, which will have material disruptive effects on the “plumbing” of our financial system.

According to Smith, 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.

*This article was first published in The Inside Investor.