Alan Oster | NAB group chief economist
Global growth is slowing and the US heading for recession, but Australia may just escape the worst of the chill. While higher interest rates and inflation create trouble for many, others will unearth opportunities at the bottom of the asset price cycle, writes NAB group chief economist Alan Oster.
The good news is that, while the Australian economy will experience a serious slowdown, its reputation as the lucky country is likely to hold firm. If the US is not already in recession, it is likely to get there soon, while our neighbours in New Zealand are almost certainly in recession already. The UK, Europe and Japan are also heading that way. Global economic growth of 2.8% might sound reasonable but outside of Covid and the GFC, we are in the worst year since 2002. One positive—if we can be parochial—is that the Australian economy will not be as badly affected as everywhere else, and the downturn should not be as severe as it had the potential to be.
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BEWARE THE FISCAL CLIFF
The not-so-good news is that Australia’s soft landing will not feel all that soft for some families. Those who saddled up on debt when interest rates were at record lows in 2021 are now hurtling towards the so-called fiscal cliff, when their fixed-rate mortgages are going to be repriced. The peak of the runoff for those mortgages will be in the second half of this year. Even if the Reserve Bank of Australia stopped raising its cash rate beyond the current 4.1%, the mortgage market is typically three months or so behind with its own rate hikes, meaning mortgage rates likely have another 1% or so to go, just catch up. Beyond that, we now expect the RBA to add a further 50 points—bringing the cash rate to a peak of 4.6%. That would take many variable mortgage rates above 7.5%, adding around $2000 per month to a $1m home loan compared to 12 months ago. This means a lot of potential pain for a lot of people already struggling with cost-of-living pressures. Inflation might be coming down but the Consumer Price Index was at 7% at the end of the March quarter, and rents and energy prices are only moving in one direction: higher. I expect core inflation to be near 4% by the end of this year and then nearer 3% by the end of 2024.
SEARCHING FOR GREEN SHOOTS
Australian economic growth is clearly slowing— NAB is forecasting 0.5% for this year, lower than the RBA’s estimate of 1.5%—as consumers rein in spending. This flatlining will likely continue into early next year. Warning signs dog the retail sector; commodities might come off recent highs; and China’s reopening will not offer much support. Even if Chinese growth hits 5.5%, it’s not going to be the big driver it was in the past. That said, very modest growth in 2024 could give way to normal growth in 2025 with inflation back inside the RBA’s 2-3% target. And the forecast slowing domestically might well throw up some medium-term opportunities. People who are not highly leveraged and have managed to maintain high incomes, or still have reserves of cash, are well placed to take advantage of what is a low point in the asset price cycle. For these Australians, now is a good time to think about investing for the long run. Sectors exposed to e-commerce, including warehousing and logistics, as well as high-tech manufacturing and health, are all likely improvers as growth rebounds.
HOUSE PRICES DEFY GRAVITY
In relation to residential property, we have a situation where the market appears to have bottomed and prices are rising even though interest rates hikes are biting. A key reason for this is migration. The long-term average for migration is around 160,000, but this year the forecast is for 480,000 people, then 300,000 in 2024. These arrivals all have to live somewhere and this demand will keep rents high, flowing through to house prices in turn. Plus, up until recently, consumers thought the RBA was nearly done. At one point, we were expecting a fall of 11% in house prices across the nation this year, but at NAB we have now revised that to a far less dramatic fall of only 4%. Longer term, we are expecting prices to move up to an annual growth rate of around 5% per annum. This is good news for homeowners, enabling those with lower mortgages to enjoy the ‘wealth effect’ that often comes as house prices rise. It will also save many of those who bought in the recent boom from the dreaded situation of negative equity.
MOVING SIDEWAYS
As for the $4.2m federal budget surplus announced in May, we once again see that instead of the budget affecting the economy, it is the other way around. Looking at the structural budget deficit, which takes out the additional revenue the economy is adding to the federal coffers, we can ascertain that the budget will essentially go sideways over the next three to four years. So, the latest budget wasn’t a big help, but it hasn’t hurt either. As for the main indicators, NAB’s growth forecast for 2023 may be lower than the RBA’s but we have inflation coming down faster. We see core inflation reaching 3% by the end of 2024, while the RBA says it will take until the middle of 2025 to get there. Unemployment will inevitably rise as the economy slows, to 4.3% in late 2023 before rising further to around 5% by late 2024. The AUD, at 67 cents against the USD at the time of writing, is likely to appreciate to around 73 cents, in part reflecting a recession in the US this year (an environment where the USD will fall against most major currencies). That will make holidays in the US a little more attractive for those of us who are on the right side of the soft landing and in a position to take advantage of the unique opportunities on offer.
In summary, though the coming 12 months will be tough, rates will be cut to nearer 3% thereafter and the economy will return to growth near trend (around 2.3%) in 2025. By then, the inflation rate should be back in the RBA’s target range and unemployment a touch below 5%. That is a very positive medium-term outlook.
The information contained in this document is gathered from multiple sources believed to be reliable as of the end of June 2023 and is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, financial and taxation advice before acting on any information in this document. ©2023 NAB Private Wealth is a division of National Australia Bank Limited ABN 12 004 044 937 AFSL and Australian Credit Licence 230686.