Nov 2, 9:01 AM
The Myth of the Soft Landing: Australia Prepares for Monetary Reality
As central bank rate hikes and geopolitical shocks crush growth forecasts, the economic bill has arrived.
The cozy fantasy of the frictionless economic soft landing has run into the harsh arithmetic of sticky inflation. As the Reserve Bank of Australia prepares to hand mortgage holders a fifth interest rate hike, pushing the benchmark cash rate to levels not seen since 2008, the central bank's grand ambition—taming inflation without cratering the labor market—looks increasingly like wishful thinking.
Major financial institutions are quietly rewriting their economic forecasts to reflect a harsher reality. At Commonwealth Bank of Australia, head of Australian economics Belinda Allen has sliced real GDP growth projections for the middle of next year from 1.8 percent down to a miserable 1 percent, with 2027 expected to yield a barely noticeable 1.1 percent. The expected bottom of this cycle is arriving both deeper and later than previously advertised.
A primary catalyst sits far beyond the central bank's control. Assumptions of a swift resolution to Middle Eastern geopolitical tension have disintegrated. Brent crude oil, which hovered near 72 dollars a barrel in early July, has bounded past 110 dollars. High energy costs act as an unyielding tax on growth, making price stability an elusive target for policy setters armed with only a single hammer: higher borrowing costs.
To break persistent price pressures, monetary discipline must now deliberately cool the labor market. National Australia Bank economist Gareth Spence indicates that unemployment may need to rise from 4.7 percent to 5.4 percent by the end of next year to bring inflation back within bounds. Commonwealth Bank offers a slightly less grim peak of 5.1 percent. Either way, the post-pandemic employment miracle is being sacrificed on the altar of inflation control.
The housing market offers little comfort. AMP chief economist Shane Oliver warns that home values could fall by up to 15 percent before bottoming out late next year, with Sydney already registering a 10 percent retreat from its peak. This severe correction triggers a classic wealth effect, forcing anxious households to retrench consumer spending while simultaneously stifling new home construction.
Politicians and union leaders are reacting with predictable dismay. While Treasurer Jim Chalmers prepares the public for a gloomy December mid-year budget update, trade unionists gather to demonstrate outside the central bank’s Sydney headquarters. Yet, protesting against rate hikes does not alter basic macroeconomic mechanics. With AMP assessing the probability of a recession at 45 percent should the central bank hike again on Tuesday, the real question is not whether the economy will slow down, but how much structural damage will remain when the tightening cycle finally ends.
Written by Martina Kirchner martina.kirchner@alpineweekly.com
