Says businesses need to stop trying to outbid one another to avoid wage inflation outbreak
Businesses need to stop trying to outbid one another for talent in order to avoid a wage inflation outbreak, according to Westpac chief economist Bill Evans.
Evans is predicting one percentage point of cash rate easing in 2024, according to a report by The Australian Financial Review, with growth at just 1% in 2023.
However, if inflation doesn’t fall as far as expected next year, the Reserve Bank could find itself reluctant to cut rates when the economy needs it most, AFR reported. Just such a situation could be caused by a high consumer price index.
“Through 2023, businesses need to embrace that difficult growth outlook and desist from excessive price increases or outbidding competitors for scarce labour,” Evans said. “In general, the prospect of flat growth should convince businesses that large wage increases and rising prices will be unsustainable by the second half of 2023.”
The RBA predicts that inflation will be restored to its target band by 2025. The central bank forecasts economic growth of 1.5% next year and in 2024.
For this year, the RBA estimates growth at 3%, while Westpac’s estimate is 2.6%. GDP figures released last week for the September quarter were lower than expected, expanding by 0.6%, or 5.9% on an annual basis, AFR reported.
The slowdown is based on household consumption predicted to decelerate from around 2% in the first half of next year to nearly zero in the second half.
“A six-month period of a stagnant economy and no growth in household spending will alert the RBA to the need to ease policy settings in 2024,” Evans said.
However, Westpac predicted more tightening to come before then. The bank projected that the cash rate – currently at a decade high of 3.1% – will hit 3.85% in May.
Evans’ predictions are based on the assumption that inflation will slow to 3% in 2024, below the RBA’s projection of 3.25%. That would allow the RBA to cut rates by a full percentage point within two years, AFR reported.
“The sharp economic slowdown in 2023 will be partly engineered by the need for the RBA to continue lifting the cash rate in the first half of 2023 as wages growth and inflation remain uncomfortably high and growth holding in at a ‘respectable pace’ – particularly in the opening quarter,” Evans said.
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