Payton Capital Quarterly Economic Update December 2022

Are we headed for a soft landing?

Where is the economy heading? One clue can be found in the language used by the RBA Governor, Philip Lowe, who has begun to use the term “soft landing” more often. “The path to achieving the needed decline in inflation and achieving a soft landing for the economy remains a narrow one,” Lowe said in announcing the board’s December rate rise.

A soft landing is not guaranteed, he is arguing, but the RBA is now willing to canvas it as a possibility This soft landing is only an option if inflation can be tamed without making unemployment worse and/or without a recession and there is reason to hope for that.

So far, progress on inflation has not caused the unemployment rate to budge. Unemployment has stopped falling, but is yet to rise, despite being at rarely seen lows. So, will Australia fall into recession?

There is no sign of it yet, with GDP growing steadily. Australian economic growth remained strong throughout the September quarter, with the economy expanding by 0.6 per cent to notch up 5.9 per cent growth over the year.

Interest rates are expected to rise only slightly more. Payton Capital expects at most one more rate hike in 2023, a view shared by Commonwealth Bank economists. Elsewhere, markets are pricing in two more rate hikes by the second half of next year and expect interest rates to top out at just over 3.6 per cent.

Whichever outcome transpires, it means most of the work in controlling inflation is now done.

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