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

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 didn't occur and in fact Australia's economy is still growing, almost too strongly for the RBA's liking.

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 to be felt by many 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 close to $11 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 very low levels but is likely to rise as more people realise we're at the peak of interest rates and inflation is falling.

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 low, recently falling to 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, high interest rates, the ongoing war in Ukraine and the Middle East and heightened geopolitical tensions.
• The International Monetary Fund (IMF) recently published its latest update on the state of the world economy, predicting sluggish growth for 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 2.9 per cent in 2024, slightly down from last year's growth.
• Several forces are holding back the recovery. Some reflect the long-term consequences of the pandemic, the war in Ukraine and 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 last year when the U.S. and Swiss banking crises, as well as the spectre 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.
• 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 has clearly peaked, and that should make it 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 has business confidence, and residential loans and building approvals have fallen.
• On the other hand, the unemployment rate remains at historic lows, with a sharp rebound in employment in January which, when combined with changes to the participation rate, saw the unemployment rate plummet from 4.1 per cent to 3.7  per cent.
• 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 it seems inflation is falling almost as fast as it has risen, so it's now almost certain that we've reached the peak of the interest rate cycle.
• Stage 3 tax cuts in the middle of next year will see all taxpayers get a reduction in their tax rates, however, I can't see the small increase in tax returns, having an inflationary effect.

• Of course, inflation has been the focus of media attention throughout the last few years, but it has now passed its peak and has now fallen for the fourth successive quarter.
• Australia’s annual inflation rate fell to 4.1% in the December quarter of 2023, down from 7.8% in the December quarter of 2022.
• The new rate is the lowest in two years and the closest in two years to the Reserve Bank’s target band of 2–3%.
• The decline in inflation exceeded market expectations. Even the Reserve Bank was expecting an inflation rate of 4.5% in the year to December.

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 up big on discretionary items such as clothes, restaurants, and lifestyle, defying cost of living pressures.
• According to the ABS:
  • Household spending increased 3.0% through the year on a current price, calendar adjusted basis.
  • Through the year, household spending increased for both services (+4.9%) and goods (+1.1%).
  • Through the year, household spending increased for both non-discretionary (+5.6%) and discretionary (+0.2%).
• Through the year household spending increased for five out of the nine spending categories. The largest increases were in:
  • transport (+9.4%)
  • recreation and culture (+6.3%)
  • health (+5.3%).

• Through the year, household spending on:
  • services rose 4.9%, driven by increased spending on transport and health.
  • goods rose 1.1% driven by increased spending on food and goods for recreation and culture.
• Through the year: 
  • non-discretionary spending rose 5.6%, driven by increased spending on transport, food and health.
  • discretionary spending rose 0.2%, as increased spending on recreation and culture offset a fall in spending on furnishings and household equipment.

• 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 inflation and interest rates is having a significant impact on consumer sentiment.
• Currently, consumer confidence is bouncing up a little from historically low levels. I see consumer confidence rising over the year as Aussies realise inflation has peaked and 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 $10.4 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 experienced a “once in a generation property boom” in 2020 and 2021 when 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 the stats from CoreLogic, Proptrack and Dr Andrew Wilson's My Housing Market all suggest our housing markets bottomed in February 2023.
• The current 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 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. 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.

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 388,800 jobs advertised
  • Total job vacancies were 388,800, a decrease of 0.7% from August 2023.
  • Private sector vacancies were 345,700, a decrease of 0.6% from August 2023.
  • Public sector vacancies were 43,100, a decrease of 1.8% from August 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 March meeting, and most commentators agree that we have reached the peak of this interest rate cycle.
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• Despite the sharp rise in interest rates over 2022, despite ticking up a little, 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.