Aussie GDP to halve in 2023?

Janus Henderson Investors forecasts that the Reserve Bank of Australia (RBA) will lift the official cash rate (OCR) to a “moderately restrictive” 3.6% by mid-2023 and that this will halve Australia’s GDP growth to 1.5%:

We expect to see the impacts of rapid monetary tightening progressively show up as we go through 2023. In our view, tightening monetary conditions and slowing consumer spending will see the rate of economic growth halve to 1.5% over 2023. Such a growth rate is below Australia’s trend growth rate, and we should see some slack emerge that helps resolve demand and supply imbalances…

Our base case view is that the cash rate peaks at a moderately restrictive 3.6% in mid-2023, making the current tightening cycle the largest and fastest in the monetary policy inflation targeting era.

The suggestion that a 3.6% OCR is “moderately restrictive” is ridiculous. With an OCR of 3.10% currently, RBA data shows mortgage interest and principal payments as a share of household disposable income will already be at the previous high recorded in 2010:

RBA: Australian principal and interest mortgage repayments to hit record by end 2022.

So, an OCR of 3.6% would lift mortgage repayments to all-time high levels as a share of household income. That by definition are “highly restrictive” monetary settings.

Indeed, average variable mortgage repayments would climb 48% above their pre-tightening level under Janus Henderson Investors’ OCR forecast, adding nearly $1,100 in monthly repayments to a $500,000 variable rate mortgage:

Add the fact that nearly one-in-four mortgages (by value) will switch in 2023 from ultra-low fixed rates originated at around 2% to rates that are more than double these levels, and you have the ingredients for a sharp retrenchment in household consumption growth – the economy’s main growth driver.

And therein lies the key problem with Henderson Investors’ GDP forecast: it tips consumption growth of 1.5% in 2023, which seems highly optimistic.

For what it’s worth, I see aggregate real GDP growth of around 1% in 2023 off the back of record immigration and strong population growth. This will mean that Australia would experience a per capita recession, whereby the economic pie grows through immigration, but everybody’s share of the pie shrinks.