If 2023 marked the likely tail end of the fastest rise in interest rates in three decades, this year will reveal just how hard the economy’s landing will be. To be sure, households trying to get by on jobseeker at $54 a day or $43 for the youth allowance could argue the economy has not been airborne for them for years.
“People on low incomes have been pushed to the absolute brink, forced to make impossible choices between feeding themselves, paying their rent or turning the lights on,” says Edwina MacDonald, the acting chief executive of the Australian Council of Social Service.
The September quarter national accounts showed overall consumption had stalled. Excluding inflation, household disposable income was down by 5.6% over the year and 8.3% below its peak two years earlier, according to the Commonwealth Bank’s head of Australian economics, Gareth Aird.
A snapshot of available data so far for the October-December period “suggests we may see an outright contraction in GDP over the quarter”, Aird says.
But those grim tidings for the year’s end tell only part of the tale. The end of 2023 may be close to the nadir in this part of the economic cycle and, barring an unforeseen blow, an upswing shouldn’t be far behind.
Government’s outlook upbeat
That employers ignored the Reserve Bank’s November rate rise to add more than 61,000 staff shows there is still momentum in the labour market. Home prices, too, reversed an early drop during 2023 to end the year close to or above previous highs bolstering at least the paper wealth of owners.
The government’s midyear economic and fiscal outlook (Myefo), released on 13 December, revealed the budget to be in unexpectedly rude health with a second straight surplus in range for the first time since 2007-08.
Few peer nations are as well placed. New Zealand recently increased its projected budget deficit by more than half for the year to next June and has delayed a return to surplus until 2026-27.
The UK government borrowed almost £100bn ($190bn) in the half-year to October and the US clocked up a US$314bn (A$450bn) deficit in November alone – the most ever for that month.
The Myefo, though, was also more upbeat than the May budget about how much the global economy would support Australia’s GDP. Net exports should add a full percentage point to growth in 2023-24 – rather than the 0.5 percentage points expected seven months earlier. That revision was significant, given annual GDP was only tipped to expand by 1.75%.
A forecast improvement on the trade front buoyed the 2024-25 outlook even more. GDP growth was unchanged at 2.25% but the net exports contribution will jump from zero to 0.75 percentage points, according to Treasury’s model.
Overseas inflation trends also look like helping. US inflation has continued to decline. China’s producer prices sank by 3% in November, indicating the world’s biggest exporter will include deflation in what it ships abroad.
A year ago, many forecasters were predicting the RBA would end 2023 with rate cuts. Their prognostications hinged in part on inflation falling faster than it has. The economy would also be skirting recession by now, many thought.
As it happened, both inflation and growth turned out to be higher than they tipped, with Opec oil supply cuts and the later Israel-Hamas war pushing up energy prices.
But just as Myefo presumably gives the government scope to increase support for consumers and businesses if needed, the RBA has the capacity to start cutting the cash rate from its 12-year high of 4.35% to help counter any sudden downturn.
As it stands, markets are already fully pricing in the first 25-basis point cut by June, according to the ASX rates tracker.
Overseas trends may be helpful too. The US Federal Reserve is now tipped to start cutting its main interest rate in 2024. Such a move would give the RBA cover to do the same without worrying about a fall in the Australian dollar jacking up the cost of imports and slowing the decline of our inflation.
Economy not slowing down
Deutsche Bank’s Phil O’Donoghue remains among the more hawkish of Australian-based economists, being the sole surveyed expert to predict the RBA would raise the cash rate in December.
He predicts that increase will now come when the board next meets in February but will be followed by four cuts, or a full percentage point, to bring the cash rate to 3.6% by the end of this year as inflation slows.
O’Donoghue believes Australian households can absorb the higher borrowing costs so far.
“Australian households still have about $180bn in excess Covid-era savings,” he says. “[Given] current levels of household debt and interest rates, the savings pool would cover the national mortgage interest bill for about six quarters.”
The RBA, too, is monitoring financial stress. In December Andrea Brischetto, the head of its financial stability unit, found fewer than 2% of borrowers were having to cope with both an income shortfall and a small savings buffer.
One factor that helped to keep the economy expanding in 2023 was the jump in population, including a record net 518,000 migrants in the year to June. (Per capita GDP has been flat or in retreat for three quarters.)
According to Myefo, net migration will drop to 375,000 this fiscal year. That will still be 60,000 more than factored into the May budget. For 2024-25, it retreats to 250,000, or 10,000 people fewer than the budget predicted.
That will be welcomed by those hoping for a slowdown in the cost of housing, whether for purchase or rent, but will remove one factor propelling GDP.
Still, economists such as Judo Bank’s Warren Hogan say the economy should remain on a “soft landing” track. The recent labour market figures “suggest the economy may prove resilient in 2024”.
“It is hard to see a sharp downturn in the economy while employment and incomes are expanding,” Hogan says, and “there’s a lot of construction work going on” even after the government cut support for 50 infrastructure projects.
“You don’t look at [the national accounts] and think the next step for the economy is another leg down.”
Cherelle Murphy, EY Oceania’s chief economist, agrees.
“The government sector doesn’t really look like it’s slowing down,” Murphy says. A lot of the states’ infrastructure spending “is actually ramping up into [this] year”.
The need to accelerate the rollout of renewable energy – as emphasised by the energy market operator recently – should provide one “little bit of upside to [next year] 2024”, she says.
Another may come from the expansion of the care economy, whether for the NDIS or an ageing population. Such industries tend to be jobs-rich and help to explain why Myefo and the RBA both project the unemployment rate to peak at 4.5% or less.
As to how the RBA might act in 2024, Murphy notes the new governor, Michele Bullock, has stressed the central bank “is trying really hard not to destroy the economy by over-tightening” even as it reins in inflation.
“They’re trying … something which has not really successfully been done in the past too many times,” she says.
Perhaps 2024 will be one of those occasions.
