Australians have been warned to prepare for a tough year, with various forecasts painting a picture of uncertainty, instability and a “bumpy” road ahead.
Economist Greg Jericho described the situation that awaits us as “bleak”, based on the International Monetary Fund’s latest outlook, saying Australia has faced “shocking” events in a year. I warned you that there was.
Mr Jericho revised down his forecast for economic growth from 1.7% to a “historically bad” 1.2%, he said in an analysis published by the paper. guardian.
“From the end of the 1990s recession until the year before the pandemic, the median annual GDP growth rate was 2.9%,” Jericho wrote.
“The IMF does not expect to achieve annual growth rates above 2.3% by 2028.”
There will be many knock-on effects from the economic slowdown, from rising unemployment to the Reserve Bank’s future interest rate policy.
High interest rates will continue
Investment management firm Vanguard’s Complete Economic and Market Outlook released in mid-December warned that “interest rate increases are here to stay.”
“Even after policy rates retreat from their cyclical peaks, interest rates over the next decade are likely to settle at levels higher than we have been accustomed to since the 2008 global financial crisis,” the report said. There is.
The economic impact of this scenario “would be significant” domestically and internationally.
“Borrowing and saving behaviors will be reset, capital will be allocated more wisely, and return expectations for asset classes will be recalibrated.”
While a higher interest rate environment will ultimately be positive in the long term, “the transition may be bumpy.”
One such consequence is a deterioration in employment conditions, including lower demand, higher unemployment rates, and fewer working hours.
Vanguard expects Australia’s unemployment rate to rise to 4.75% this year from its current low of 3.8%.
However, the RBA points out that rising unemployment will help reduce the ferocious inflation that is the main driver of rapid interest rate hikes.
The RBA expects inflation to fall by 3.5% by the end of the year.
But that trajectory is slower than expected, meaning interest rates will have to remain high for a long time.
While many economists expect the RBA to start lowering the official cash rate towards the end of 2024, Vanguard’s view is much more pessimistic.
The current 4.35% interest rate is not expected to change this year.
But Commonwealth Bank chief economist Stephen Halmaric believes the RBA will achieve a “narrow path” to destroying inflation.
Halmaric expects the cash rate to fall by 75 basis points in the second half of this year, starting in September, and another 75 basis points in 2025.
Resilient economies are slowing down
Australia’s economy has remained surprisingly resilient in the face of a worsening cost of living crisis, rising interest rates and persistently high inflation.
A review of the situation by the IMF noted that “unemployment remains low and output remains low.” [is] Outpacing potential, home prices are rising after the 2022 adjustment. ”
“After a strong post-pandemic recovery, Australia’s economy has slowed but remains resilient,” the report said.
“GDP growth slows to 2.1% [year-on-year] in [the third quarter of 2023]This was up from 3.7% in 2022 as consumer demand slowed in real terms due to a decline in real household disposable income due to higher inflation and higher mortgage rates.
“Net exports also contributed to growth, driven by strong iron ore and coal sales and a strong recovery in tourism and education.
“Output is estimated to be around 1 percentage point above potential, and unemployment remains low.”
Vanguard’s economic growth forecast, like many other indicators, is between 0.75% and 1.25%, well below trend.
This view is shared by the Reserve Bank, which expects “the economy to remain below trend as cost of living pressures and rising interest rates continue to weigh on demand” in its November Monetary Policy Statement. It revealed that.
Consulting firm KPMG’s latest economic outlook says that last year’s deterioration in economic conditions was stopped by “extraordinary levels of population growth driven by overseas migration.”
“Australia’s population is estimated to have increased by approximately 630,000 people in the year to 30 June 2023, an increase of 2.4 per cent,” the report said.
“This population growth supported consumption and investment, providing the government with significant unplanned tax revenue and enabling the reversal of budget outcomes.”
It’s unclear how long that will last.
Although the Commonwealth Bank acknowledges there are a range of challenges for the economy, it remains relatively optimistic about the outlook.
“Looking to the future, 2024 will present more than its fair share of risks and challenges, particularly geopolitical risks and the US presidential election,” Halmaric said.
“Despite these obstacles, Australia’s economy remains in relatively good shape.”
Consulting firm Deloitte Access Economics said in its latest outlook note that the domestic economy is on a “knife edge.”
David Lambens, a partner at the firm and author of the latest report, said the pain was being felt across the economy.
“The retail industry knows this. Trend retail growth of just 1.3 per cent is the lowest trend retail growth recorded since 1982, just before Australia won the America’s Cup,” Rumbens said.
“Consumer confidence remains extremely fragile and is close to record lows. Business bankruptcies are also on the rise through 2023, impacting the construction industry as well as the accommodation, food and beverage services, manufacturing and retail industries. ing.
“But Australia’s reeling economy must not only deal with today’s cost of living crisis, but also help Australia’s business sector look to 2024 as a year of growth.
“The business cycle will soon pass its trough and start to pick up again. Real wages will start to rise…and strong population growth will provide fundamental support.
“Beyond the short-term economic cycle, there are also significant opportunities for Australian businesses through the adoption of AI and the necessary transformation towards net-zero emissions by 2050.”
Global economic headwinds will be felt in Australia in the short term. Vanguard warned that Europe’s largely bank-based economy is “already in recession” and that China’s recovery from the coronavirus is “weaker than expected.”
He also expects the U.S. economy to enter a “moderate recession,” which is needed to keep inflation in check.
However, it remains possible that the US will avoid a recession and instead experience a “soft landing.”
Finance Minister Jim Chalmers warned late last year that “high interest rates, persistent inflation, a slowing Chinese economy and a particularly weak real estate sector are all weighing on the global outlook.”
Housing outlook
Like other major banks, the Commonwealth Bank expects house price growth to continue into 2024, albeit at a slower pace than seen recently.
At the national level, we expect values to rise by 5%, which is much smaller than the 9.6% spike that occurred last year.
“A slowdown in net migration and consistent and coordinated action to increase the supply of new housing are critical to restoring some balance to Australia’s housing market,” Mr Halmaric said.
Meanwhile, rival bank NAB expects house price growth across the capital region to be 5.4% this year, with Brisbane leading the way with a 6.5% rise, followed by Adelaide (6.2%) and Perth (6.2%). continues. ).
The bank expects prices to rise by 5% in Sydney and 5.5% in Melbourne.
At a national level, Westpac expects house prices to rise by 6% over the year, with the highest increases expected in Perth (10%), Brisbane (8%), Sydney (6%) and Adelaide ( 6%). cent).
ANZ is also on track for a 6% rise in house prices nationally as a severe housing shortage pushes down the price floor.
When it comes to the rental market, relief is unlikely to come soon for the millions of tenants who are battling soaring prices, limited supply and fierce competition.
Tim Lawless, research director at data house CoreLogic, said rent prices rose 8.3% nationally through 2023.
Although it was less than the 9.5% increase in 2022, it was four times the 10-year average before the coronavirus pandemic.
“In dollar terms, the annual increase in residential rent equates to an increase of approximately $46 per week, based on median rental prices,” Lawless said.
“Rent growth is likely to continue to be above average in 2024, given that we have yet to see a significant response in rental supply.”