Banking giants sour on Australia’s economic fortunes as base rate plots course to 4.35%
National Australia Bank (NAB)’s downside Australian economic assumptions are enough to get anyone’s nerves rattled.
Buried on page 85 of today’s first-half trading update, NAB’s number crunchers warned that the economy could slip into recession this year, and stay that way throughout 2027, before an economic recovery at long last in 2028. By then, unemployment will have spiked above 10%.
House prices, meanwhile, could collapse by nearly 26% this year, followed by another near-15% decline in 2027.
NAB has moved to reinforce its balance sheet in face of this worst-case scenario, having increased its bad-debt buffer by $300 million last month.
NAB’s base scenario is less apocalyptic, with unemployment peaking at 4.6%, GDP continuing to grow in the low-single-digits, and house price growth ticking along at 4%.
But NAB isn’t the only one raising alarm bells that the Australian economy could be in for a rough ride.
Commonwealth Bank recently downgraded its outlook on the Australian economy, anticipating unemployment to peak at 4.6% in 2027 (from 4.3% currently) and GDP growth to slow to 1.7%. Most worryingly, CBA expects inflation to climb as high as 5.4% before the cycle ends.
Westpac, meanwhile, expects GDP growth to slow to just 1% this year, with unemployment nearing 5%. The bank – Australia’s second largest in terms of home lending – warned that Victoria and New South Wales households face “one of the largest and most prolonged contractions on record, extending back to the early 1990s”.
Leading economists including former treasury secretary Martin Parkinson believe there is a very real chance that Australia could enter a stagflationary phase, as sharply rising living costs fuse with a slowing economy and rising unemployment.
Most analysts agree that soaring oil prices amid the ongoing conflict in the Middle East have soured Australia’s economic fortunes at a time when the government is at pains to improve the country’s flailing productivity.
For NAB boss Andrew Irvine’s part, he wasn’t all doom and gloom as he updated shareholders on Monday.
“Conflict in the Middle East has created a far more volatile environment,” said Irvine. “As Australia's largest business bank, every day we talk to businesses across the economy and they are giving us two clear messages.
“Firstly, they are worried about how long this volatility may last and secondly, they are being challenged by inflationary pressures.
“But what is also coming true is that Australians are resilient businesses, are experienced at managing cost volatility as well as seasonality, and are making the required adjustments.”
But there’s no getting around the fact that Australia’s economic fortunes are not as bright as they were merely six months ago – making tomorrow’s interest rate decision from the Reserve Bank of Australia (RBA) a particularly anxiety-inducing one.
A slightly better-than-anticipated March inflation read did nothing to dispel the market’s expectation of a 25-basis-point rate hike tomorrow, with ANZ, CBA, NAB and Westpac all expecting the base rate to be lifted to 4.35%.
Higher floating mortgage rates are likely to follow as the lenders move to pass higher funding costs onto borrowers.
Brokers should brace for more rate shopping, refinancing and debt restructuring among clients.
A 25-basis-point rate hike will immediately reduce many borrowers’ serviceability, especially those on variable-rate mortgages. Lenders will update assessment rates to reflect the higher cash rate plus their serviceability buffer, meaning new borrowers will need to demonstrate they can afford significantly higher repayments than today’s actual rates.
That will cut maximum borrowing capacity, pushing some buyers down in price bracket or out of the market altogether. A third consecutive hike would add a cumulative $300 a month to repayments on a $600,000 mortgage compared to the start of the year. All this at a time when housing affordability is already plummeting.
Existing borrowers rolling off fixed rates could face a double squeeze: higher monthly repayments and tighter refinancing tests if they want to switch lenders. Some may fail new serviceability assessments despite an impeccable repayment history, trapping them with their current bank on less-competitive terms.
For investors, higher interest costs could erode rental yield and may force portfolio restructuring or asset sales.
Alternatively, perhaps Bendigo Bank chief economist contrarian expectation that the RBA will keep rates on hold will prove accurate. Either way, it’s going to be a rate call to watch.
