Will the RBA go for aggressive rate hikes as Q1 GDP exceeds estimates?

Highlights

• The Australian Bureau of Statistics (ABS) has released the economic growth data for the March 2022 quarter.
• A higher-than-expected GDP rate signifies that the economic activity has remained buoyant even in times of distress.
• With the unemployment rate standing at record lows, experts suggest that the central bank may raise rates more aggressively.

The March quarter GDP data recently released by the Australian Bureau of Statistics (ABS) exceeded the expectations of several analysts and economists. The Australian economy expanded by 0.8% in the first three months of 2022, fuelling speculations of faster interest rate hikes by the central bank. As high-interest rates fear loom, mortgage holders face a challenging road ahead amidst increasing inflationary pressures.

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The ABS release reported that the GDP was up 3.3% through the year, while annual inflation stands at 5.1%. The annual growth rate of 3.3% appears faster than the pre-pandemic average of around 2% and economists’ estimate of 3%. The data has further highlighted the momentum of the Australian economy, which is the root cause of the central bank’s tightening drive.

Following the release of the March quarter GDP data, three-year government bonds and Australian equities edged higher on Wednesday. The higher-than-expected GDP growth rate will be closely monitored by market participants, including the Reserve Bank, for its upcoming interest rate decision.

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What does the current GDP rate signify?

The current state of the economy highlights a mix of favourable and challenging factors. The Australian economy seems to be facing its biggest challenge yet of tackling supply-side pressures persisting globally. While demand has quickly sprung back to pre-pandemic levels, supply has been slower to respond. This is primarily due to global events such as the Russia-Ukraine war and supply-side issues created after the pandemic.

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Global lockdowns and then a sudden kickstart in economic activity have created a chaotic situation that has shifted the very foundation of the global economy. Additionally, climate adversities have been rampant across the country.

Adding rapidly rising interest rates to this mix of factors, one can see a perfect concoction of uncertain events that seem to be making the economy vulnerable. Prior to the release of the GDP data, many banks had expected the economic growth rate to be lower between the 0.1-0.6% range due to these uncertain market events,

However, the GDP rate has been much higher than this range, proving that the Australian economy is still full of momenta created by relief measures. The red-hot property market, which has only now begun to cool down, has also been a key constituent of rising GDP.

But experts suggest that the increase in GDP rate in March is quite dismal and much slower than the previous quarter’s growth rate of 3.4%. Omicron-related fears can also be blamed for much of the slowdown created during the March quarter.

A stark feature of the March 2022 quarter was the rise in consumer spending and a decline in the household savings ratio. The household saving to income ratio fell to 11.4% from 13.4% as households dug into their pandemic savings for recreational purposes.

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What to expect from interest rates?

The latest economic growth data has somehow validated the RBA’s hawkish stance as it raised rates for the first time in over a decade in May 2022. With the newly elected Labor government taking charge, it will be enticing to see how the country manages the high-interest rate environment amidst elevated inflation.

Some economists, including those at AMP Capital Markets and ANZ Banking Group Limited, are projecting a rate hike of 40 basis points next week. These expectations are accompanied by the forecast that the cash rate could reach 1.5-2% by the end of this year.

More concerns are piling up in the backdrop due to the record-low unemployment rate. Despite the low unemployment rate of 3.9%, wage growth has not picked up in Australia. Due to this, cost-of-living pressures for consumers have disproportionately increased compared to a rise in wages. RBA governor Philip Lowe expects a jobless rate below 4% will be crucial in promoting higher wages. However, this could further fuel inflation in the economy.

At the same time, commercial banks have already started raising their interest rates for consumers. Though spending continues to be robust, higher interest rates could curb household expenditure in the coming months.