Australia is likely to avoid a recession due to the strong rebound of overseas migration while borrowers can expect the RBA to start cutting interest rates by the end of the year, according to the chief economist of the central borrowing and financing authority of New South Wales TCorp.
“The prospects for Australians to have a soft landing are greater and one of the key reasons for that is the return of overseas migration. Particularly over the last six months, that’s rebounded very strongly,” TCorp’s chief economist Brian Redican tells Investment Magazine.
Overseas migrants grew by 171,000 people in the 2022 financial year, a significant jump from the net loss of 85,000 people the year before according to data from the Australia Bureau of Statistics.
While the RBA is expected to increase rates by another two to three times this year with significant impact on the housing market, building construction and consumer spending, “given that tailwind from the return of overseas migrants, that’s the main reason why we’re not forecasting recession for Australia”, he says.
Wage outlook key for RBA
The RBA’s monetary policy outlook will revolve around the outlook for wages growth as Australia has lagged behind the hefty salary increases in other economies, particularly in the US and the UK.
“[The RBA] tightening cycle has to be strong enough to prevent wages growth from leading up, whereas in the US, they have to weaken the labour market sufficiently to get wages growth down. So I think the US Fed has got a much harder job compared to the RBA,” he says, explaining the rationale for a potential rate cut by the RBA later this year. TCorp is forecasting wage growth in Australia to hit 3.5 per cent.
“If they don’t see a rapid acceleration of wages growth by the end of the year and housing is weaker and consumer spending is weaker, then they do actually have the opportunity to cut interest rates.”
Hard landing for the US
In an article titled ‘9 things to watch’ published on Monday, Redican said the US is likely to experience a hard landing as the aggressive rate increase by the US Federal Reserve Bank will take a longer time to affect the housing market, construction, spending and employment. “The magnitude of the increase in rates, however, does suggest that the impact becomes apparent, it will be sizeable,” he said in the article.
However, the US will emerge from recession more quickly than from the Global Financial Crisis as the US economy does not appear to have the same financial imbalances that were present before the GFC.
Redican questions whether central banks should respond to future inflationary surges by aggressively raising interest rates, given households will have weakened balance sheets from the loss of real wages and higher borrowing costs.
“Another option for central banks is to actually keep the level of interest rates higher than they’ve done in the past, [and] have a bit more confidence that they’re not overheating the economy when these adverse supply shocks in the economy there,” he says.
“Any change in monetary policy at that stage can be more modest. They won’t have to raise rates by four percentage points, they might just have to raise rates by one percentage point or one-and-a half percentage points because the level of rate is already at a more normal level.”