Deloitte Access Economics Business Outlook: Reserve Bank puts the economy on a knife-edge

17 April 2023: With global economic growth set to slow to a trickle in 2023 as efforts to quell inflation in several economies come to a head, the economic environment in Australia is finely poised.

After two further interest rate increases in early 2023 – to go with the eight straight hikes from May 2022 – the Reserve Bank of Australia (RBA) is tempting fate, and Australia is facing the weakest rate of economic growth outside of the pandemic since the recession of the early 1990s.

Releasing the March 2023 edition of the flagship Business Outlook report, Deloitte Access Economics Partner and report lead author, Stephen Smith, said: “Our view remains unchanged – the additional 50 basis points of increases earlier this year were unnecessary, and have prompted a further downgrade in Australia’s growth outlook.

“That downgrade is centred on our households, and a ‘consumer recession’ is now forecast in 2023, with household spending expected to finish the year below where it started.

“At a cash rate of 3.6%, most Australians will be just fine. Many, however, will not. In just 10 months, the cost of servicing an average $600,000 mortgage will have risen by more than $14,000 per year once those rate hikes are fully passed through.

“But that’s just the average, and there are plenty of mortgage holders on either side of those numbers.”

The latest Financial Stability Review from the RBA suggests that under fairly typical baseline assumptions for income growth, inflation and unemployment, some 15% of variable-rate, owner-occupier mortgage holders will be in negative cash flow by the end of 2023, and with many of these borrowers already projected to be in this position.

“On these numbers, at least 300,000 Australian households may currently be experiencing negative cash flow, with mortgage repayments and essential living expenses together exceeding household disposable income. That should shock all of us,” Smith said.

And it’s not just mortgage holders, with renters increasingly squeezed by higher rents, and with little respite in sight.

“This is an issue of supply and demand, but private dwelling investment is forecast to fall rather than increase through 2023, before recovering only modestly in 2024,” Smith said.

“Construction is expected to commence on significantly fewer houses and apartments compared to previous years – in fact, Deloitte Access Economics expects that 2023 will see construction commence on the fewest dwellings in more than a decade and almost 70,000 below the level commencements recorded in 2021. On these numbers, new housing supply would just barely keep pace with population growth, let alone ease what is a critical undersupply.

“In short, we are building far too few dwellings and, with a myriad of supply side challenges unresolved, that is unlikely to change in the near term.”

With households hurting, dwelling construction in the doldrums and the global environment shaky, Deloitte Access Economics has revised down expectations for Australian economic growth in calendar year 2023 and 2024 to just 1.5% and 1.2% respectively. If realised, Australia’s growth will be the slowest outside the COVID-19 pandemic since the recession of the early 1990s.

Industries

Australian industry output will increasingly reflect slowing global and domestic economic conditions, including the effects of weaker household spending.

“Some sectors of the economy are better positioned to face the slowdown than others, with retail and construction forecast to feel the pinch, while agriculture may pull back after recent highs,” Smith said.

States and territories

As Australia’s slowdown broadens through 2023, so too are economic conditions across the states and territories.

“While the consumer-led slowdown will hit hardest in New South Wales and Victoria, conditions are softening in most other jurisdictions as well,” Smith said. “Western Australia and Queensland are still relative bright spots, with mineral exports adding to the growth outlook.”

Key forecasts: Deloitte Access Economics Business Outlook, March 2023

Business Outlook is a quarterly publication presenting detailed economic forecasts and commentary to help understand the economic forces shaping the business environment. The forecasts cover a detailed assessment of the national economy, world growth prospects, each of Australia’s states and territories, and industries.