Australian households face a couple of tough years but an easing inflation rate should deliver real wage growth by 2024 and the potential for lower mortgage repayments sooner, the budget predicts.
The economy remains relatively resilient even as global growth slows to its worst performance in more than two decades.
While Australia’s gross domestic product increase will more than halve from 3.25% in 2022-23 to 1.5% in the coming fiscal year, the economy should accelerate to 2.25% in 2024-25. The Reserve Bank, by contrast, last week forecast GDP growth of 1.25% and 1.75% for the coming two years.
While cost-of-living pressures will remain, the consumer price index peaked at 7.8% and is on track to be 3.25% by June 2024, or slightly lower than the RBA’s and the October budget’s prediction of 3.5% by then. The CPI should ease to 2.75% by June 2025 – lower than the RBA’s forecast 3%.
The government’s capping of gas and coal prices last December and $3bn in electricity price rebates will lop 0.75 percentage points off inflation in 2023-24. While retail power prices are still expected to increase a further 10% and gas 4% next year, that’s lower than a pre-intervention estimate of a 36% hike for electricity and 20% for gas prices.
Jobs should also remain relatively plentiful and employment grows slightly faster than forecast in October. The jobless rate is expected to end the current June quarter at 3.5%, close to half-century lows, before gradually rising to 4.25% by mid-2024 and to 4.5% by mid-2025, outlooks shared by the RBA.
Workers should start to enjoy wages growing faster than the inflation rate by early next year, or slightly sooner than expected by the October budget. That would mark the first real increase in three years, and by the June quarter reach a 0.75% annual pace, “helping to drive the recovery in domestic activity through 2024-25”, the budget said.
The modestly brighter outlook may give little immediate comfort for households battling to cover soaring expenses, from mortgage repayments to utility and grocery bills. The consolation is that the government budgets are predicted to be in a much healthier position than previous forecasts and may improve further if commodity prices exceed predictions.
“Economic growth is expected to strengthen in 2024-25 as inflation returns to [the 2%-3% target] and positive real wage growth continues,” the budget said. GDP growth should also quicken to 2.75% by 2025-26, aided by “the continued recovery in population growth and an associated increase in investment in new housing will reinforce the expected rebound”.
Most finance ministers abroad would covet Jim Chalmers’ numbers even if the budget outlook starts to dim in future years as costs mount for the NDIS, defence and other expenses.
The government’s underlying cash surplus for this fiscal year is expected to come in at $4.2bn. The first surplus in 15 years is an improvement of $41.1bn since the October budget and compares with the almost $100bn deficit predicted for this year in the 2021-22 budget.
By contrast, the US is on track for a deficit this year of 5.2% of GDP, the UK at 5.4%, and the EU at 3.6%. Canada, which has a similar commodity-based economy, is on track for a deficit this year of 1.5% of GDP, according to the Economist. Australia’s GDP should grow faster than any of these economies.
Australia’s official interest rate, lifted to 3.85% by the Reserve Bank a week ago, is also lower than the US, the UK and Canada, and investors expect it to fall by early next year.
“Australia is performing better than most other comparable OECD nations,” said Gareth Aird, head of Australian economics at the Commonwealth Bank. “Key indicators like the participation rate and the share of Australians in work recovered more quickly than most other OECD countries from the pandemic and remain elevated [at] around record highs”.
Still, the budget is forecast to return to deficit by next year with a $13.9bn shortfall. By 2025-26 it should swell to $36.9bn, or 1.3% of GDP, before easing back to $28.5bn the following year.
The outlook could improve if commodity prices – which contributed about one-fifth of the improvement in the budget position since October – surprise again on the upside. The Treasury raised its price forecasts for the coming year but they remain conservative.
For instance, the Treasury lifted its prediction of iron ore prices to US$60 a tonne from US$55 in previous budgets, still well shy of the roughly US$110 the red rocks were fetching on Tuesday in spot markets.
Coking coal used in steelmaking should average US$140/t in the coming year, up from the US$130 in the October budget. Spot markets were trading at about US$250 on Tuesday.
Thermal coal burned in power stations should average $US70/t Treasury forecasts, up from $US60, or well shy of the roughly $US170 being offered now.
Even without extra royalty revenues, debt repayments are expected to be less of a drain with gross debt exceeding $1tn two years later – in 2025-26 – than the October budget predicted. Net interest expenses in the four years to 2025-26 should total $62.6bn, almost $20bn less than expected just seven months ago.
