Australian economic and financial markets update | RBA Chart Pack December 2023

Key takeaways

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.

Australia's economy doesn't operate in isolation, so it's important to keep track of how the economies of our major trading partners are performing.

While only a year ago many economists suggested a number of countries could fall into recession in 2023, this just didn't occur and in fact Australia's economy is still growing too strongly for the RBA's liking causing the most recent rate hike in November.

Inflation around the world seems to have peaked and this should make this easier for the RBA to get inflation under control in Australia but it will take longer than they hoped.

So far the impact of the Reserve Bank's 13 interest rate rises has barely begun to be felt as we're still spending boldly.

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 three years ago and 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.

Australia's residential property market is valued at over $10 trillion, yet only $2.1 trillion worth of debt is against this large asset base. In fact 50% of homeowners don't have a mortgage against their homes.

Currently, Australia has a shortfall of housing, and the cost of residential construction has risen substantially in the last few years. This means that most developments on the drawing board are not currently financially viable to get out of the ground.

Consumer confidence remains at historically low levels and is likely to fall further after the latest rate rise.

Australia's business sector is doing well, but the near-term business outlook is one of softening consumption and investment growth, tightening government expenditures, and high debt costs.

The unemployment rate is still historically low, at 3.7%, meaning Australians can feel secure about their financial futures.

The labour force participation rate is an estimate of an economy's active workforce. The participation rate has increased over the last few years, and there are currently over 400,000 jobs advertised, but nobody to fill them.

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 is currently facing a number of challenges, including high inflation, rising interest rates, the ongoing war in Ukraine, and the lingering effects of the COVID-19 pandemic.
• The International Monetary Fund (IMF) recently published its latest update on the state of the world economy, predicting sluggish growth for 2023 and 2024, as many challenges persist and policy tightening is taking effect.
• According to its World Economic Outlook, the organization now expects global GDP to grow by 3.0 per cent this year, down from 3.5 per cent in 2022. For next year, the IMF predicts 2.9 per cent growth, a slight downward correction from its April 2023 forecast of 3.0 per cent.
• Several forces are holding back the recovery. Some reflect the long-term consequences of the pandemic, the war in Ukraine the war in the Middle East and increasing geoeconomic fragmentation. Others are more cyclical in nature, including the effects of monetary policy tightening necessary to reduce inflation, withdrawal of fiscal support amid high debt and extreme weather events.
• All things considered, the IMF finds that risks to its latest outlook are slightly more balanced compared to earlier this year when the U.S. and Swiss banking crises as well as the specter of a potentially disastrous U.S. debt default cast large shadows over the global economy.
• Sure the global economy is facing a number of challenges, and it is unclear how these challenges will be resolved. However, it is important to remember that the global economy has shown resilience in the past, and it is likely to weather these challenges as well.

• Of course, Australia is not the only country suffering from inflation which has been a concern for policymakers worldwide.
• Global headline inflation is expected to fall from 8.7 per cent in 2022 to 6.9 per cent by the end of 2023 and 5.8 per cent in 2024. Underlying (core) inflation is projected to decline more gradually, and forecasts for inflation in 2024 have been revised upward.
• Supply chain disruptions, increased consumer spending, and rising energy prices have contributed to inflationary pressures and now the war in the Middle East is creating a further level of uncertainty.
• Central banks face the delicate challenge of managing inflation while supporting economic growth and employment.
• However, inflation around the world seems to have peaked and that should make this easier for the RBA to get inflation under control in Australia.

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 have business confidence, and residential loans and building approvals have fallen. But on the other hand, the unemployment rate remains at near historic lows, wages are slowly rising and though retail spending is slowing, we’re still spending up.
• In fact theBlack Friday retail boom was spectacular with an approximate 13 per cent overall rise in Australian retail sales during the Black Friday period
•  At the same time, rents are skyrocketing adding to inflationary pressures and of course, house prices are rising across the nation.
• The Reserve Bank's new governor has hinted baby boomers are to blame for Australia's cost of living crisis in her statement after interest rates rose for the 13th time in 18 months in November. Michele Bullock, herself a boomer, warned inflation would stay 'higher for longer' and blamed older Australians as responsible for keeping inflation high as they're still spending up big and many own their homes without a mortgage, meaning rates are not hurting them as much as they are younger generations.
• While we’ve passed the peak of inflation this cycle, the level of inflation remains stubbornly high creating a dilemma for our Reserve Bank who are walking a tightrope trying to quell inflation without sending us into recession by keeping raising interest rates.
• Hopefully, now we've also reached the peak of the interest rate cycle.
• GDP growth is forecast to increase gradually from early next year, supported by household consumption and public demand. Household consumption growth is forecast to increase to around its pre-pandemic average, supported by a recovery in real income growth and a pick-up in household wealth. Exports will continue to be supported by the rebound in tourism and solid growth in education-related travel.
• Also, Stage 3 tax cuts in the middle of next year will see all taxpayers get a reduction in their tax rates. Those earning between $45,001 and $120,000 will see a reduction of 2.5 points in their income tax rate, while on the other end of the scale, high-income earners will benefit the most with a difference of up to 15 points. Increased after-tax income for Australia’s higher income earners will have a “wealth effect” that will encourage some to upgrade their homes. This may also have a spin-on effect as more wealthy families will help their children into the property market acting as “the Bank of Mum and Dad” with either gifting their children and grandchildren money or giving them a loan.

• Of course, inflation has been the focus of media attention throughout 2023, and it has now passed its peak, however, it is not receding as fast as the RBA would like.
• The Australian Bureau of Statistics reported that the monthly CPI indicator rose 5.6% in the 12 months to September. The most significant price rises were in Housing (+7.2%), Transport (+9.4%), and Food and non-alcoholic beverages (+4.7%).
• The annual movement for the monthly CPI indicator excluding volatile items and holiday travel rose 5.5% in September, in line with the rise of 5.5% in August. This series excludes Fruit and vegetables, Automotive fuel, and Holiday travel and accommodation.
• Annual trimmed mean inflation was 5.4% in September, down from the rise of 5.6% in August.

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.
• Despite the Reserve Bank's best efforts to slow down household spending, we’re still spending big on discretionary items such as clothes, restaurants, and lifestyle, defying cost of living pressures.
• According to the ABS:
  • Household spending increased 2.7% through the year on a current price, calendar-adjusted basis.
  • Throughout the year, household spending increased for services (+7.0%) but fell for goods (-1.9%).
  • Throughout the year, household spending increased for non-discretionary (+7.0%) but fell for discretionary spending (-2.0%).
• Through the year household spending increased for seven out of the nine spending categories. The largest increases were in:
  • Transport (+13.4%)
  • Health (+10.8%)
  • Alcoholic beverages and tobacco (+7.1%)

• Throughout the year, household spending on:
  • services rose 7.0%, driven by increased spending on transport and health.
  • goods fell 1.9%, driven by a fall in furnishings and household equipment.
• Through the year:
  • non-discretionary spending rose 7.0%, driven by spending on transport, health, and food.
  • discretionary spending fell 2.0%, driven by furnishings and household equipment and recreation and culture.

• This chart also shows our savings ratio has now dropped to close to 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 inflation and interest rates is having a significant impact on consumer sentiment.
• Currently, consumer confidence is at historically low levels.

• 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 $10.2 trillion, yet there is only around $2.1 trillion worth of debt against this large asset base. In fact, 50% of homeowners don't have a mortgage against their homes.

• We experienced a “once in a generation property boom” in 2020 and 2021 where the value of almost every property in Australia increased by 20% -30%. Since then we have worked our way through the downturn phase of the housing market and there is plenty of evidence that our housing markets have turned the corner earlier this year.
• In fact, the latest figures from CoreLogic, Proptrack and Dr Andrew Wilson's My Housing Market all suggest our housing markets bottomed in February 2023.
• This upturn in housing values coincides with consistently low advertised supply levels at a time when our population is growing strongly.
  
• 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 shared their 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 also due to 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.
• In other words... there is no end in sight for the undersupply of dwellings.

While the property pessimists were making a fuss about falling housing loan commitments, which are clearly a leading indicator of what's ahead for our property markets, the following chart shows that they are still well above long-term averages and now rising again.

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

• One of the notable trends in Australia's labour market has been the shift towards more flexible work arrangements. The pandemic has accelerated the adoption of remote work, prompting many businesses to reconsider their work policies. This shift has implications for worker mobility, productivity, and the geographical distribution of jobs.
• The current employment of 3.7% is still virtually the best Australia has seen in decades meaning Australians can feel secure about their financial futures.
• It's likely the unemployment rate will rise moving forward now that our international borders have reopened, and the return of foreign workers and international students will likely impact labour market dynamics.

• 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 390,400 jobs advertised
  • Total job vacancies were 390,400, a decrease of 8.9% from May 2023.
  • Private sector vacancies were 346,600, a decrease of 9.2% from May 2023.
  • Public sector vacancies were 43,800, a decrease of 6.3% from May 2023.

• While national average wages have underperformed inflation over the last couple of years, meaning that “real” wages have actually fallen, it’s likely we’ll move into a time when we experience 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 December meeting and they will not be meeting again until February 2024, however, this rate-tightening cycle has been both the largest and the most rapid on record by some margin with rates rising by 4.25%.
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• Despite the sharp rise in interest rates over 2022, 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.

The following chart shows the interval between previous peaks in interest rates and how long they remained high before they eventually fell.

About Michael Yardney Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and one of Australia's 50 most influential Thought Leaders. His opinions are regularly featured in the media.