CBA issues warning for a per capita recession ahead of further RBA rate hikes

In an economics report released today, Commonwealth Bank announced its forecast for a recession in 2023 as Reserve Bank rate hikes finally catch up with consumer spending. 

The big bank has pencilled in a final 0.25% rate hike for the 7th February RBA meeting, with at least 0.50% worth of cuts predicted for the end of the year as the Australian economy slows. This would mean a cash rate peak of 3.35% in a few weeks.

But with other big banks like Westpac still hedging bets on another 0.75% worth of rises this year (with a 3.85% peak in May), is the RBA at risk of fumbling the ‘soft landing’ in its war against inflation?

Despite inflation running away from us last year, wages haven’t kept pace with the times. Households have mostly had to absorb price shocks and rate hikes with extra savings accumulated during the early years of the pandemic. 

Many fixed rates on home loans are set to expire in 2023 as well, which have so far ‘blunted’ the impact of rate hikes against a sizable chunk of Australian mortgages. Property prices have also plummeted, eating into the equity and value that had previously boomed to record growth in May 2022. 

CBA calls these forces the winds of a perfect storm. All will sweep across Aussie households and place pressure on consumer spending, which until now has been cited as ‘high’ and ‘strong’ by the RBA when justifying rate hikes. 

Another critical bellwether – the employment rate – is expected to wobble. CBA forecasts that as businesses feel the squeeze, unemployment could lift to 4.25% by the end of the year. For context, CBA holds a 4.0% unemployment rate by October as an ideal “soft landing” for the tightening economy. Currently, unemployment is at 3.5%.

These predictions only matter if the RBA rests official interest rates at 3.35% in February. Pushing the cash rate higher (as NAB and Westpac expect) could destabilise the soft landing the RBA hopes for.

This could result in what CBA calls a “per capita recession”, meaning the GDP won’t grow as fast as the Australian population. This is different from a 'technical' recession, which is a dramatic loss in GDP growth over consecutive quarters regardless of the population numbers, such as the 2008 Global Financial Crisis. 

However, some pundits claim that the distinction between a per capita and technical recession is unhelpful at best and nonsense at worst. As Australian economics expert David Taylor put it on Twitter, it’s a “fancy way of saying no technical recession but it’ll sure feel like one”.

RBA decisions remain a key figure to watch in 2023. By beginning its record-breaking tightening cycle last year, the central bank has marked inflation as the enemy and remained committed to bringing it under control – despite the threat rate hikes pose to overly indebted households.

Rate cuts forecasted for the end of the year may bring an iota of relief, but this depends on the RBA holding a calmer, more dovish course than many pundits expect. CBA’s report highlights the real risk of the central bank overdoing it and sparking a recession, which could stress family budgets on top of inflation and high mortgage repayments. 

“Monetary and fiscal policy are the key uncertainties – the path of the cash rate from here will play the dominant role in determining economic outcomes in 2023,” says CBA head of Australian economics, Gareth Aird.

“Recession is not our base case, though a quarterly contraction in economic activity in 2023 is a distinct possibility.”

Despite the Reserve Bank of Australia not meeting in January, a trickle of variable rate changes has come through from lenders reading the landscape. Buyers may have an opportunity to leap into a quieter (and cheaper) housing market this year, but borrowers will need to watch their budgets carefully. 

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