RBA warned that February rate rise risks economic downturn

In its quarterly update on the economy, Deloitte Access Economics expects growth to slow to just 1.7 per cent this year as households cut back dramatically on their spending and the housing downturn deepens, raising the risk of a contraction in at least one quarter if the central bank tightens its squeeze on activity.

A majority of economists expect the RBA Board to raise the official cash rate by 0.25 of a percentage point to 3.35 per cent at its first meeting for 2023 on February 7.

But Deloitte Access Economics partner Stephen Smith said that would be "a mistake".

"Australia's consumer-led recovery is rapidly running out of road, with the combination of falling house prices, rising interest rates, high inflation, low levels of consumer confidence and negative real wage growth expected to combine to see spending growth decelerate markedly over coming months," Mr Smith said.

"In our view, any further increases in the cash rate beyond the current 3.1 per cent could unnecessarily tip Australia into recession."

Mr Smith said there is mounting evidence that consumers, who embarked on a big spending spree when pandemic restrictions were lifted, are "starting to hurt".

Deloitte estimates that after growing by 6.5 per cent last year, household consumption will slow to just 1.5 per cent this year as households feel the pinch of high inflation and the rapid increase in interest rates.

Mortgage repayments are on track to rise to a record high as a percentage of household disposable income in coming months, the Deloitte report said.

Mr Smith said dwelling investment, which has also been an important driver of growth, is also set to weaken dramatically this year.

House prices are falling and housing finance and approvals have sowed sharply. According to Deloitte, the country is "experiencing the fastest housing market correction since monthly records began in 1980".

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There will be an important update on inflation on Wednesday when the consumer price index for December is released. In November the annual rate rebounded to 7.3 per cent but Treasurer Jim Chalmers told Sky News there are some "welcome developments" regarding price pressures in the economy.

"Shipping costs came off a bit quicker than we anticipated, housing costs similarly, and some other indicators as well," Dr Chalmers said. "Obviously...we want inflation to moderate as soon as it can."

Mr Smith said inflation likely peaked in the December quarter at 7.8 per cent and will ease from there, though he warned its slowdown would be gradual.

Both the Reserve Bank and Treasurer share the view that inflation will ease lower during this year but Dr Chalmers cautioned that "we've still got a big inflation challenge even as we get to the other side of the peak. Inflation will be higher than we'd like for longer than we'd like".

Deloitte expects this will mean incomes, allowing for inflation, will continue to go backwards for some time yet.

It has forecast wage growth to accelerate to 3.8 per cent this year but that is still below expected headline inflation (5.8 per cent). Income gains are not expected to outstrip the pace of price growth until 2024, adding to the financial pressure on households.

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