The messages from the recent national accounts support our pessimistic growth outlook.
The recent national accounts for the September quarter were largely in line with our expectations and they further emphasised some of the key developments we see in the Australian economy that will lay the foundations for a modest growth outlook in 2023 and 2024.
We continue to forecast a slowdown in the growth profile for the Australian economy from 2.6% in 2022 to 1.0% in 2023 and 2.0% in 2024.
The key to this profile is the consumer.
Household consumption is forecast to slow from around 2% (6 month annualised) in the first half of 2023 to near zero in the second half. That would see growth through the year of 1.0%.
The first half will benefit from the spill over of the momentum in the second half of 2022 which is expected at around a 4% pace (six month annualised) while the building negative forces of a rising interest rate burden; the fading reopening of the economy; a much more modest fall in the savings rate than we saw in 2021 and 2022; a damaging negative wealth effect from falling house prices and negative real wages growth will weigh heavily on the household sector.
Consistent with a depressing outlook for domestic sales and the expiry of the tax allowances in June, business equipment investment is forecast to contract by around 7% in the second half of 2023. This hit to activity will be compounded by a contraction in new residential investment and in home renovation activity.
A six month period of a stagnant economy and no growth in household spending will alert the RBA to the need to ease policy settings in 2024. Overall output growth in 2024 is forecast to improve to 2%, with the bulk of that expansion (1.5%) coming in the second half of the year.
Inflation will be lower in 2024 (at 3%) than the RBA’s current forecast of 3.25%, allowing the RBA to cut rates by around 100 basis points through that year.
The sharp economic slowdown in 2023 will be partly engineered by the need for the RBA to continue lifting the cash rate in the first half of 2023 as wages growth and inflation remain uncomfortably high and growth holds in at a “respectable pace” – particularly in the opening quarter.
The themes which are discussed below from the September quarter national accounts are expected to extend through 2023.
Risks to the profile are evenly balanced.
Inflation and wages may fall much more quickly than we envisage allowing the RBA to bring forward the rate cuts and avoid the last hike (to 3.85%) we are anticipating for May.
On the other hand, inflation throughout 2023 may be stickier than we expect. The RBA would be unable to cut rates in 2024, as anticipated, condemning the Australian economy to another very difficult year with weak growth and no prospect of any interest rate relief.
While there is mounting evidence that relief from supply side inflation is in prospect demand factors remain uncertain.
Through 2023 businesses need to embrace that difficult growth outlook and desist from excessive price increases or out bidding competitors for scarce labour. In general, the prospect of flat growth should convince businesses that large wage increases and rising prices will be unsustainable by the second half of 2023.
The observations below on the recent evidence on the evolution of the economy are supportive of our assessment.
The Australian economy expanded by 0.6% in the September quarter for annual growth of 5.9%
Household spending growth slowed in the quarter from 2.1% in the June quarter, to 1.1%, although it did contribute all the 0.6ppts of overall growth. Motor vehicles sales and operations (0.4ppts); hotels, cafes and restaurants (0.4ppts); and transport services (0.3 ppt’s) contributed most of the 1.1ppt growth in household consumption. While not as strong as in the June quarter, the opening up effect was once again apparent as a key driver of consumer spending, although there were some examples (recreation and leisure) where the opening up effect has already faded (that the ABS advise that this surprise slowing in recreation was more apparent in the goods component than services, as well as gambling).
Part of this lift in spending was funded by a further fall in the household savings rate from 8.3%, in June, to 6.9%, although the major fall from a peak of 19.4% in September 2021 (associated with the delta lockdowns) has largely worked its way through.
In reviewing the household cash flow for the September quarter, we estimate that household incomes lifted by $8.2bn; were boosted by interest and dividend payments of $4.5bn but were reduced by a substantial leakage of $5.1bn in higher interest payments as rising interest rates bite. That fall in the savings rate released $4.2bn in free funds supporting a nominal increase in spending of around $10bn.
As a point of comparison with the June quarter we note that interest payments only increased by $1.4bn while the boost from the fall in the savings rate was $9.5bn for an overall boost in nominal spending of $11.4bn.
That comparison with the June and September quarters highlights the rebalancing of the falling savings rate and rising interest cost that will weigh even more heavily on spending as we go forward.
Prospects for growth in consumer spending are easing as the reopening effect fades and the savings rate settles back at a more normal level. However, given the accumulated $260bn in excess household savings it is likely that the savings rate will fall below equilibrium (judged to around 6%) as households draw on these excess balances. We expect that through 2023 that savings rate can drift down to around 3% but our forecasts anticipate that the boost to available spending power will be more than offset by the rising interest cost.
Consumer spending was also boosted by household incomes in the September quarter.
Compensation of employees rose 3.2% (including 2.7% in wages and salaries) in the quarter up from growth in the June quarter of 2.5% (2.2% in wages and salaries).
However, households were challenged by a sharp increase (2.0%) in the household consumption deflator up from 1.5% in the June quarter and the fastest quarterly gain since March 1988.
The weakness in housing activity was not only apparent in property turnover (subtracted 0.2ppts from growth) but a 2.2% decline in renovation work.
Business investment was generally lack lustre (up 0.7%) with a 3.0% fall in machinery and equipment being offset by a 4.3% increase in non-residential construction.
There are some clear themes in the latest set of national accounts.
Household spending, boosted by a falling savings rate, continues to be the driver of growth largely through the reopening lift from travel; accommodation and hospitality; and motor vehicle purchases.
Some specific drag is apparent in the weak real estate market.
As we move forward, the reopening effect will fade; property weakness will linger; the savings rate will find a floor; and consumer spending growth will continue to slow.
In addition, the drag on incomes from rising interest rates will intensify through 2023 just as we saw the drag lift from $1.4bn in the June quarter to $4.5bn in the September quarter.
But price and wage pressures are building, and it is these contrasting forces that will challenge policy. Our forecasts continue to embed a lift to a peak of 3.85% in the RBA cash rate by May next year.
