Storm clouds may have gathered over the global economy, slowing growth more than we would expect outside of recession, but the big picture reveals some rays of light for Australia.
By Alan Oster, Group Chief Economist at NAB.
There is no sugarcoating it: the global economy is in a fair bit of trouble. Inflationary pressures arising from supply chain shortcomings and energy price hikes triggered by Russia’s invasion of Ukraine have sent a shiver up the spine of policymakers the world over. Equity markets are not going to look great for a period. Central banks in most advanced economies are taking an aggressive approach with cash rate hikes designed to rapidly reduce liquidity in the system—to the point that I fear they’ll look back in 12 months’ time and say “woops we overdid it”. The Reserve Bank of Australia followed suit in June, with Australians now looking at our highest jump in borrowing rates since the mid-90s; the full effect of which will not be felt till the middle of next year. And yet, our home waters look decidedly less choppy than offshore.
Slowed but not capsized
While we have revised our growth prediction for the Australian economy downward to around 2.3 per cent for 2023—the slowest rate for 30 years outside of Covid-19 and the GFC—maintaining momentum of any kind is cause for optimism. Comparable economies are either dead flat or going backwards, with skyrocketing purchase costs and inflation rates not seen here. Ultimately our post-pandemic rebound was stronger than expected. Everyone had supportive fiscal policy during the global health crisis, and Australia’s was very supportive; the difference is we could afford such measures because of our low debt-to-GDP ratio, when the likes of the UK and Germany could not. Yes, inflation might get up to 8 per cent here, but in the UK there is talk of 20 per cent. While overseas counterparts are saying “woe is me”, Australian businesses may uncover fresh opportunities. Consider our low wages growth so far and Australia is well positioned for the medium term.
Anxiety mingled with hope
Economics is part-science, part-psychology, and psychological factors will be extremely important in the year ahead. One of the pitfalls of our current situation is the paradox of thrift, whereby financially fearful consumers curb their spending to such a degree that they tank the economy in a sort of self-fulfilling prophecy. The average Australian will certainly be liquidity-constrained next year, but looking closely at the intention data suggests we are not going to see spending fall through the floor.
Moving beyond standard surveys of consumer sentiment, the consumer stress index implies that the confidence of Australians in job security is offsetting concerns about the rising cost of living. Indeed, our unemployment rate is the lowest it has been in 50 years. Employers in almost every sector are complaining about the inability to source suitable labour, much of which has to do with the fact that we usually see around 180,000 migrants entering the workforce each year and Covid-related travel restrictions brought that to a standstill. The shortages have not yet brought about a massive increase in wages but say they grow 3.75 per cent over the next two years, that is still manageable. What is critical is that unemployment stays where it is, or goes up a little bit to 4 per cent by 2024, because that represents a great buffer for Australia.
Spotlight on trivial pursuits
We cannot say for certain what form the collective belt-tightening will take because the pandemic upended lifestyle priorities for a lot of people. We naturally expect restaurants and travel agencies to suffer as people rein in their discretionary expenditure, for example, but plenty of sectors are reporting a defiant post-lockdown mentality among their customers of “stuff it, nothing is certain so I may as well keep living my life”. In the past we might talk about the family dog having his dinner traded down to cheaper cuts of meat —to mean that shoppers are making cheaper brand substitutions—but we will have to wait and see how far people are pushed.
One group I am concerned about are the CBD retailers on leases governed by the consumer price index because they could be facing 9 per cent rent increases at a time when shoppers are buying less.
Heat out of housing
One of the most emotive topics in any discussion of economics is home ownership. Rather than drown in discussions of stagnating house prices in our major cities, however, we should zoom out to consider the incredible price rises we saw before and during the past couple of years. What is happening in the mainstream is more orderly market correction than crash. Most householders can rest assured their home will still be worth more than when they purchased it once the dust settles.
Take into account the remote working shift and we should see prices for lifestyle property in commutable regions, and rural settings for that matter, holding strong. There is a likelihood that offshore investors will make up a significant portion of buyers in these areas, and those with a foothold in prestige regions like the Mornington Peninsula are going to make sure high-end housing stocks remain low. In addition, rents are expected to keep growing at an above-average rate over the next couple of years.
The middle of 2023 will represent a key moment for reassessment since that is when many people will be rolling off their 2 per cent fixed-rate home loans on to 5 per cent variable rates. At the same time, housing credit growth might slow to about 3 per cent, but it is not going to go backwards. In the medium term, housing prices will be going up because Australians tend to revert to bricks and mortar whenever other markets dwindle.
Skirting the shore
With some productivity-enhancing reform, Australia should swerve recession more smoothly than other nations. I do not see interest rates going as far as the markets fear and if unemployment and wages growth stay sub 4 per cent, in tandem with productivity growth of close to 1 per cent, we are looking at core inflation of about 3 per cent by 2024. Far from plain sailing of course, but that would be a very good outcome.
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