They say that a year is a long time in politics. With the tumultuous ride that has been the post-reopening period in Australia, there has certainly been a lot happening in 2023!
It’s hard to pick out only three big headlines, but here are 3 big macro stories which I think really shaped the economy in 2023.
Firstly, immigration picked up again… and how it did!
Shane Wright at The Australian highlighted how Australia’s population grew by an unprecedented 181,600 in the first quarter of calendar year 2023, with this headline:
While we don’t yet know the final estimates for growth in the resident population in 2023, we can safely say that all previous records will be shattered, and this has impacted every corner of the Aussie economy, from busier traffic to record low rental vacancy rates.
High population growth has become a contentious political issue, and not only in Australia.
Secondly – and unhappily – at this stage of the economic cycle, the world has been prone to conflict as nations compete for scarce resources, and there have been many such headlines in 2023. Let’s pray for some better news on this front in 2024.
Of course, this has been a part of the inflation story through 2022 and 2023, with high food, travel, and energy prices all adversely impacted by supply issues.
Thirdly, due to this combination of high demand and interrupted supply, the nasty spike in inflation led Australia’s central bank to lifting the interest rate target to a 12-year high of 4.35 per cent.
This is having the desired effect of slowing down household consumption and the rate of inflation.
However, it’s also causing a good deal of angst in terms of mortgage stress, while business insolvencies are rising to decade highs, especially in the construction sector.
The current expectations for interest rates in 2024
First, let’s look to the US for the most influential gauge of global sentiment.
At the time of writing, Federal Funds futures in the US are pricing in close to 125 basis points of interest rate cuts in 2024.
This represents a substantial loosening of monetary policy conditions, and potentially points to some risks for a ‘hard landing’ for the US economy.
Now, how about in Australia?
Generally, although we have made some decent progress towards tackling the surge in inflation Down Under, we are further behind on this journey.
Australia’s international borders stayed closed for a long time, we’ve grappled with shortages of materials and labour, and now our cities are struggling with the highest annual population growth on record as the international students, working holiday makers, and permanent migrants all return in droves.
While the next move in interest rates in Australia may well prove to be down, absent something dramatically breaking, we also shouldn’t expect any interest cuts any time soon.
The Reserve Bank will take a breather now until February, when further data becomes available on inflation.
3 key themes to watch as we enter 2024
Finally for today, here are 3 key themes to watch for 2024.
Firstly, when will the tight labour market in Australia finally break?
Although unemployment has increased a little since the mid-2022 cycle lows, and underemployment has clearly increased, an unemployment rate of under 4 per cent is still considered to be a tight labour market.
Secondly, there will be some changes afoot for dwelling construction.
Forward-looking indicators such as job advertisements suggest that we’ll start to see a return to a more sustainable balance between supply and demand, but it hasn’t happened yet.
A second theme to watch is that rental vacancy rates have been at all-time lows for several months consecutively, while loans to purchase or construct a new home have been running at the lowest levels since the global financial crisis.
The government has pledged a notional target to build 1.2 million homes over a five-year period before the decade is out, an ambitious feat which has never been achieved before in Australia.
Something will need to change here in terms of market dynamics.
For example, the market regulator APRA may release the 3 percentage points lending assessment buffer for new loans, which has acted as a handbrake on borrowing, or there may be government incentives to encourage the purchase and construction of new homes.
And thirdly, we will see a tug of war between mortgage stress and household consumption.
For leveraged households there will be some pain to come in 2024, as many fixed rate mortgages have reset to considerably higher interest rates.
Not every household has mortgage debt, though, and some older cohorts are continuing to spend freely.
Editor’s note: you can expect to hear much more from Pete in 2024, as he is tasked with providing his updates and insights directly to the Rask Invest analyst team (and you), via a monthly update. We’re fortunate to have Pete part of the Rask community and cannot wait to hear, read and watch more of his insights. Catch him every week on The Australian Property Podcast.
