Real wages could drop to levels last seen in 2009, forcing households to cut spending to make ends meet, as new forecasts flag high inflation and rising interest rates over the next two years.
In its most recent monetary policy update, released on Friday, the RBA admitted low-income households might have to rein in spending as they struggled to deal with soaring prices for necessities such as food and petrol. The bank revealed it expects real disposable household income to fall for almost a year and a half, including a 3.1 per cent drop in the June quarter of next year.
Unions and economists urged the federal government to fast-track policies to protect the nation’s most vulnerable households from the cost-of-living crisis.
IFM Investors’ chief economist, Alex Joiner, said the revised forecasts showed real wages falling to where they were in 2009, describing the situation as an “extraordinary setback” for the nation’s households.
He said it was hard to see how households, which make up 60 per cent of economic activity, would continue to spend given the decline in their real incomes.
“We won the war on the economic impact of COVID but I’m afraid we’re about to lose the peace,” he said. “It’s not just the Reserve Bank’s problem. The federal government has to come up with ways to make sure this situation doesn’t happen.”
ACTU president Michele O’Neil said the federal government had to urgently work to boost real wages, arguing it was too long to wait until mid-2024.
“This is no ‘wage-price’ spiral that the business lobby argues. This is a downward spiral for the living standards of working people,” she said.
“The cost-of-living crisis, and now the rapid and brutal hike in interest rates, is forcing many workers to deplete their savings. They simply cannot withstand their wages continuing to go backwards in real terms.”
Treasurer Jim Chalmers said Friday’s RBA statement reinforced the “significant challenges” Australian households were facing, including higher interest rates, rising costs of living and falling real wages.
“Our economic plan is a direct and deliberate response to the challenges facing our economy,” he said. “That’s why we are working hard on responsible cost-of-living relief, easing capacity constraints and boosting productivity in the long run.”
Shadow treasurer Angus Taylor said the RBA’s statement showed Chalmers was “already at odds” with the bank, just a week after delivering his own economic statement to parliament.
“Not only did the treasurer fail to deliver a plan, his forecasts were out of date within a week,” he said.
The latest RBA forecasts are a significant downgrade from its previous monetary policy statement in May, when the RBA was expecting household income to grow by 0.9 per cent in the final three months of this year. Now it believes it will shrink by 0.9 per cent.
The bank said people would soon start to feel the impact on their home budgets, admitting those dependent on welfare payments could struggle as a larger proportion of their income went to necessities that are rising in price including food and fuel.
“While household balance sheets are generally strong and many households should be able to absorb these price increases, others have limited savings buffers and may have to reduce spending elsewhere,” the report said.
“For some of these more vulnerable households, the impact of price rises will be mitigated to some extent by the indexation of social assistance payments twice per year, though price rises will reduce recipients’ real incomes in the near term.”
The RBA downgraded all its forecasts for economic growth over the next two years. By December this year, it expects GDP to be expanding at an annual rate of 3.2 per cent, compared to its 4.2 per cent forecast made three months ago.
By the middle of 2024, economic growth is tipped to be down to 1.8 per cent.
Wages growth, while picking up, is not expected to accelerate much above what the bank had been forecasting. It expects the wage price index to be climbing by 3.4 per cent in mid-2023 and 3.8 per cent in mid-2024.
Consumer prices, despite the RBA’s lift in interest rates, are also tipped to grow strongly.
Inflation is expected to peak at 7.8 per cent in the December quarter, edge down to 6.2 per cent by the middle of next year and still be at 3.5 per cent in the June quarter of 2024.
Unemployment, however, is expected to defy the tightening in monetary policy. It is forecast to be at 3.4 per cent by the middle of next year and inch up to 3.7 per cent 12 months later.
Commonwealth Bank’s head of Australian economics, Gareth Aird, said the forecasts were not good news for Australian households.
“We believe that high inflation coupled with aggressive rate hikes and falling home prices will be the more dominant force on household consumption from here,” he said.
In response to inflationary pressure, the RBA has lifted interest rates by 1.75 percentage points over four consecutive months this year, its most aggressive increase in rates in nearly 30 years.
The RBA said the “competing forces” of a tight labour market, which leads to stronger wage growth, and increasing cost-of-living pressures made predicting household spending “unusually uncertain”.
“Employment growth could be stronger than expected, and strong household balance sheet positions could support household consumption by more than anticipated,” the report said.
“Alternatively, a decline in real incomes for the average household could weigh on spending more than expected, particularly if household wealth is also declining.”
All major economies are facing increasing headwinds caused by the sharp lift in global inflation, supply chain disruptions and strong domestic demand.
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( Information from smh.com.au was used in this report. To Read More, click here )