Australian economic and financial markets update | RBA Chart Pack November 2024

If a picture paints a thousand words, then this collection of charts should do a pretty good job of painting the landscape as it affects our economy and our property markets.

Each month the RBA summarises macroeconomic and financial market trends in Australia by providing a detailed chart pack.

World Economy

• Australia's economy doesn't operate in isolation, so it's critical to keep track of how the economies of our major trading partners are performing.
• The global economy has been surprisingly resilient, despite significant central bank interest rate hikes to restore price stability and while the global economy is currently facing a number of challenges, inflation seems to be falling and the USA has dropped its interest rate by 0.5% last month, and he's likely to cut rates again in November and December.
• Of course the ongoing war in Ukraine and heightened tensions in the Middle East are a concern.
• The International Monetary Fund (IMF) recently published its latest update on the state of the world economy, predicting that five years from now, global growth should reach 3.1 percent—a mediocre performance compared with the pre-pandemic average.. Their report suggests...
• Growth in major advanced economies is becoming more aligned as output gaps are closing. The United States shows increasing signs of cooling, especially in the labor market, after a strong 2023. The euro area, meanwhile, is poised to pick up after a nearly flat performance last year.
• Asia’s emerging market economies remain the main engine for the global economy. Growth in India and China is revised upwards and accounts for almost half of global growth.
• Yet prospects for the next five years remain weak, largely because of waning momentum in emerging Asia. By 2029, growth in China is projected to moderate to 3.3 percent, well below its current pace.

•  Inflation around the world has clearly peaked, and that should make it easier for the RBA to get inflation under control in Australia.
• The IMF project global inflation will slow to 5.9 percent this year from 6.7 percent last year, broadly on track for a soft landing.

Australia's Economy

• The Australian economy is currently facing a number of challenges, yet it is still performing more strongly than the RBA would like.
• Clearly, the impact of the previous interest rate rises hasn’t really been what the Reserve Bank had hoped for.
• Sure, over the last year consumer confidence has fallen, as has business confidence and building approvals have fallen, but residential property loans are rising and loans to investors are up 31% over the last year and house prices generally keep rising.
• In September 2024, in seasonally adjusted terms:
  • unemployment rate remained at 4.1%.
  • participation rate increased to 67.2%.
  • employment increased to 14,521,900.
  • employment to population ratio increased to 64.4%.
  • underemployment rate decreased to 6.3%.
  • monthly hours worked increased to 1,968 million.
  • full-time employment increased by 51,600 to 10,028,400 people.
  • part-time employment increased by 12,500 to 4,493,500 people.
• At the same time, wages are slowly rising, and though retail spending is slowing, we’re still spending up big.
• Rents are skyrocketing, adding to inflationary pressures, and, of course, house prices are rising across the nation.
• We’ve passed the peak of inflation this cycle, and the sharp reduction in household power bills due to government energy rebates drove inflation in August to its lowest level in three years, however the temporary decline is set to be ignored by the Reserve Bank when making it's interest rate decisions.

• The Consumer Price Index (CPI)  rose 0.2 per cent in the September 2024 quarter and 2.8 per cent annually.
• The September quarter’s rise of 0.2 per cent is the lowest outcome since the June 2020 quarter fall which occurred during the COVID-19 outbreak and was driven by free childcare.
• While prices continued to rise for most goods and services, these increases were offset by large falls for Electricity and Automotive fuel prices.  

Household Sector

• The following chart shows how the disposable income for Aussie households has dropped over the last year as they have grappled with rising costs, yet it has picked up recently.
• Despite the Reserve Bank's best efforts to slow down household spending, we’re still spending up big on discretionary items such as clothes, restaurants, and lifestyle, defying cost of living pressures.
• According to the ABS: in September:
  • Household spending fell 0.1% month-on-month on a current price, seasonally adjusted basis. 
  • In seasonally adjusted, current price terms household spending decreased for four out of the nine spending categories. The largest decreases were in:
    • clothing and footwear (-1.8%)
    • transport (-0.6%)
    • recreation and culture (-0.4%).
  • In seasonally adjusted, current price terms household spending on goods fell 0.4% month-on-month, driven by decreased spending on Motoring goods, Purchase of vehicles, Clothing and Footwear, Alcoholic beverages and tobacco, and Goods for recreation and culture.
• In calendar adjusted, current price terms, household spending increased through the year for six states and territories. The strongest increases were in:
  • Western Australia (+6.0%)
  • Queensland (+3.4%)
  • Northern Territory (+3.2%).

This chart also shows our savings ratio has now dropped to below pre-pandemic levels as we keep spending our stashed cash to support our lifestyles.

• I keep careful track of consumer confidence because it's a good leading indicator of what's ahead for our economy and property markets.
• The media's continual barrage of negative news about the economy, inflation and interest rates is having a significant impact on consumer sentiment.
• Currently, consumer confidence is bouncing up from historically low levels. I see consumer confidence rising moving forward as Aussies realise inflation has peaked and that interest rates will eventually fall.

• While rising interest rates and inflation have eaten away at the average household budget, in general, Aussies have significantly more equity in their homes than they had before the pandemic, and they started this rising interest rate cycle with considerably more savings stashed in their savings or offset accounts than they had at the beginning the pandemic, three years ago.
• The following chart shows our net wealth position, and that our main assets are in real estate (particularly our homes) and financial assets (including our superannuation.)
• As you can see, the net wealth position of Australian households is still high since asset growth has outpaced the increased debt levels, meaning our net wealth position, while falling a little lately, is very strong.
• The Australian residential property market is valued at over $11 trillion, yet there is only around $2.3 trillion worth of debt against this large asset base. In fact, 50% of homeowners don't have a mortgage against their homes.

• We have now experienced 22 months of consistent property growth, however our housing markets have been very fragmented.
• The current upturn in housing values coincides with consistently low advertised supply levels at a time when our population is growing strongly, however price growth has slowed over the last few months.
  
• Currently, Australia has a shortfall of housing, which is particularly showing up in our rental markets with historically low vacancy rates and skyrocketing rents.
• The government has a plan to build 1.2 million homes in the next 5 years, but I can't see how this will be achieved.
• The cost of residential construction has risen substantially in the last few years, in part because of the lack of available skilled labour and supply chain restrictions.
• This means the cost to build new apartments has risen to such an extent that most developments on the drawing board (see the following chart of dwelling approvals) are not currently financially viable and won’t be built until the market is prepared to pay substantially more than the current prices.
• It has been estimated that currently we have a deficit of over 200,000 properties, something that won't be made up any time soon.
• In other words... there is no end in sight for the undersupply of dwellings. It also means that there is substantial inbuilt equity in established properties as their replacement cost is very much higher than their current market value.

• Also read:Everything you need to know about the state of Australia’s property markets in 20 charts – November 2024
• Also read:This week’s Australian Property Market Update – Latest Data, State by State November 19th 2024
• Also read:Melbourne property market forecast for 2025
• Also read:Sydney property market forecast for 2025
• Also read:Brisbane’s property market forecast for 2025

While the property pessimists were making a fuss about low housing loan commitments, which are clearly a leading indicator of what's ahead for our property markets, the following chart shows that they have picked up recently and are well above long-term averages.

In particular, investor lending is up over 30% in the last 12 months. In other words, strategic investors are taking advantage of the current window of opportunity to get into the housing market.

Business Sector

Labour Markets

• Australia's labour market continues to show impressive resilience in the face of high-interest rates and unprecedented global challenges.
• The ABS has reported the following Key Statistics

• The labour force participation rate is an estimate of an economy’s active workforce. The formula is the number of people ages 16 and older who are employed or actively seeking employment, divided by the total non-institutionalized, civilian working-age population.
• The participation rate in Australia averaged 63.51% from 1978 until 2022, as you can see from the chart below the participation rate has increased over the last few years as a bigger percentage of Australians have entered or re-entered the workforce.

• As you can see from the chart below, service-related industries have had significant growth, and in particular, there has been strong growth in the healthcare, accommodation and food services industries.

• Currently, there are 329,900 jobs advertised a decrease of 5.2% from May 2024.
  • Private sector vacancies were 294,100, a decrease of 4.9% from May 2024.
  • Public sector vacancies were 35,800, a decrease of 7.5% from May 2024.

• While national average wages have underperformed inflation over the last couple of years, meaning that “real” wages have actually fallen, we are now experiencing moderate wage increases.
• Recently the Fair Works Ombudsman increased the minimum award wage.

Interest Rates

• Interest rate levels set by the RBA respond to changes in inflation. When rates rise, they slow economic growth and discourage borrowing, typically signalling a strong economy. On the other hand, low interest rates promote economic growth.
• The latest RBA decision was to hold rates steady at their November meeting, and most commentators agree that we have reached the peak of this interest rate cycle, but rates won't fall at least until February 2025.
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• Despite the sharp rise in interest rates over the last few years, home loan arrears remain at post-GFC lows, defying those property pessimists who forecast that significant levels of mortgage stress would lead to forced sales by homeowners who got over their heads in debt.