The Reserve Bank and the Labor government are optimistic that Australia can avoid a recession, even as the central bank sets on a path of rapid interest rate rises to contain ballooning inflation.
However, the slump in consumer confidence in recent months in the face of higher borrowing costs, cost of living pressures and falling house prices is expected to take its toll on spending and economic growth later this year and into 2023.
"We expect this to see the growth rate in the economy fall below trend," Westpac chief economist Bill Evans warns.
The latest Westpac-Melbourne Institute leading index, which indicates the likely pace of economic activity three to to nine months into the future, fell to 0.58 per cent in May from 1.09 per cent in April.
While a result above zero indicates that economic growth is expected to hold above its long term trend - seen about 2.8 per cent annually - Mr Evans said there was an important theme emerging around the outlook.
He said there had been a significant shock to consumer confidence and a major contributor to the slowdown in May.
The drop in confidence, and a fall in Australian share markets, partially offset the positive components in the leading index, such as rising commodity prices and dwelling approvals.
The risk of a recession in the United States and a spillover into other parts of the world has dominated fears in global financial markets in recent weeks.
Addressing an event in Sydney on Tuesday, RBA governor Philip Lowe said a recession was not on his horizon, pointing to low unemployment, strong household budgets and the highest terms of trade ever.
But an analysis by Deutsche Bank chief economist Phil O'Donaghoe says while Australia may avoid two quarters of economic contraction, which commonly signals a recession, he is predicting a one percentage point jump in the unemployment over the course of 2023.
"We would describe that as a recession," Mr O'Donaghoe said.
He expects the unemployment rate to rise from around 3.75 per cent by the end of 2022 to 4.75 per cent at the end of 2023.
This would be the result of his expectation that the cash rate rises to 3.1 per cent by the end of this year to rein in inflation, which the RBA now expects will reach seven per cent.
Mr O'Donaghoe, like many other economists, is expecting the RBA to lift the cash rate by a further 50 basis points at its July 5 board meeting, matching the increase in June, which was the biggest move since February 2000.
But he also expects a 75 basis point increase in August after the June quarter inflation figures on July 27 and then 25 basis point monthly increases over the rest of the year.
In the interim, and backing the RBA's positive outlook, is still strong demand for workers.
The National Skills Commission confirmed online job advertisements rose by a further 0.9 per cent per cent in May to stand at 298,400.
Over the year, recruitment activity stands 25.7 per cent higher, and when compared with pre-COVID levels it is up a massive 77.3 per cent.
Job ads increased in all states and territories in May, while half of the eight occupational groups monitored by the commission saw a rise in job ads.
The "professionals" category saw the largest increase in job ads in the month (up 3.5 per cent) and while demand for labourers was the weakest (down 3.1 per cent) they were still a staggering 147.8 per cent up on the year.