MNI INSIGHT: RBA Confident Of Avoiding Recession As Econ Cools

The Reserve Bank of Australia is not expecting a domestic recession as the economy heads to lower growth later this year on weaker consumer spending as part of the cost of controlling inflation, MNI understands.

The RBA’s view is that the economy is currently running hot largely due to strong employment, and while wages are increasing, they are still likely to be lagging inflation which is expected to reach around 7% this year.

The gap between wages and inflation, which was previously a problem for the RBA as it sought to drive inflation into its 2% to 3% target range, is now seen as a factor in controlling inflation.

Consumer spending is being supported by the tight labour market and high levels of residual savings, but is being eroded by inflation and higher rates.

DATA IN FOCUS

The central bank will be watching data such as retail sales, and high frequency data from its liaison program for signs of cooling consumer spending, much of it driven by interest rate rises which are increasing the cost of mortgage payments.

The RBA Board meets next Tuesday and is expected to continue with its tightening cycle, which has taken rates from the record low of 0.10% to 1.35% since May, (See: MNI STATE OF PLAY: Household Spending A Factor For RBA Hikes).

Second quarter inflation data is due on Wednesday this week, with the CPI expected to come in at a 32 year high of 6.2% - or higher - after printing at 5.1% in Q1, (See: MNI INSIGHT: RBA Now Data Driven As Guidance Suspended).

Of all the data, the RBA will be paying close attention to data on rents, which rose 1% nationally on an annualized basis in Q1, for signs of the inflationary trend.

With the employment market so strong, with unemployment at a 50 year low of 3.5%, the RBA believes that June quarter GDP growth will be positive and keep Australia out of recession. In the first quarter GDP grew 0.8% with household spending up 1.5% on a quarterly basis.

MNI understands the RBA is expecting robust growth figures for Q2, but that GDP will weaken in the latter part of the year.