Navigating Economic Uncertainty.
This time last year, we wrote an article about "reading the tea leaves for 2023". As of February 2023, the RBA had raised the cash rate for a 9th time, with predictions the cash rate would need to continue rising to further dampen inflation, which remained stubbornly high. Fast forward to the present (March 2024), and we’ve witnessed another four rises in the cash rate, the latest being in November. So, what might be in store for 2024?
Early last year, the economic outlook was uncertain, with predictions ranging from a small chance of a recession to a looming mortgage cliff once many households rolled off sub-2% fixed rates. However, the Australian economy, has exceeded expectations, buoyed by a low unemployment rate and rising wages.
Rising Costs & Higher Wages
There’s no doubt that increasing the cash rate from an historic low of 0.1% to the current rate of 4.35% has had an impact, with the CPI Index falling from around 6.5% in February 2023 to a current reading of 3.4%. Nevertheless, inflation remains outside the RBA’s target range of 2-3% with costs of certain goods and services such as groceries and energy remaining high. Rents also continue to rise due to record low vacancy rates in most capital cities, prompting demands for higher wages, which have been met due to the strong employment market.
However, the increase in wages is keeping consumption levels high, making the RBA’s task of containing inflation more challenging, which if not reduced could lead the RBA to keep the cash rate higher for longer. Recent employment data though shows the unemployment rate is starting to tick up, and there’s a strong rise in the number of failing businesses, with the number of collapsing builders at its highest level since the GFC.
The latest statement from the RBA notes that the Governor has ‘not ruled any further rate changes in or out’, emphasising that the war on inflation has not yet been won. Economists are concerned about the consumption piece, which if not constrained could complicate efforts to reduce rates, potentially fuelling further spending. In this regard, it has been pointed out that the rejigged Stage 3 tax cuts that come into effect from 1 July could stimulate consumer spending, along with ongoing wage rises such as the recent agreed rise of between 18-28% for 200,000 workers in the aged care sector.
Housing Market Dynamics
Another concern is the housing market, which is already showing signs of renewed activity, driven mainly by lack of new construction and high immigration levels. The number of investors in the market is also starting to climb driven by increasing returns, especially for units, although not all markets are enjoying increasing values with Melbourne showing more sluggish growth, attributed to Victoria’s increased property taxes. Some market commentators have pointed to the recent growth in values has been driven by the assumption the increasing rates cycle has peaked and that rates will start to fall later this year. However, the ANZ CEO recently poured some cold water on that by stating he believed any rate cuts are unlikely in 2024.
Interest rates are not solely influenced by monetary policy but are also impacted by fiscal measures within the domain of Governments. Government spending, both at federal and the state level, has been stimulatory, mainly through increased spending on infrastructure projects (new roads, rail, hospitals etc) which has piled increasing pressure on already strained resources, such as construction materials and skilled labour.
With government budgets already under pressure from Covid support measures, saddled with large debts, there are growing calls to provide cost-of-living relief. The federal treasurer has already stated that the government will provide more relief in the upcoming May budget, emphasising measures will be responsible and targeted. State governments are also under pressure to provide relief, with expectations of cash splashes in upcoming budgets, particularly in election-bound states like Queensland.
In summary, forecasting the economy for 2024 is about as accurate as a BOM weather forecast, with reading the tea leaves muddied by factors such as rising unemployment coinciding with rising wages. Throw in other unknown variables such as overseas events (a second Trump presidency?) making it challenging to look beyond the next few months. However, there appears to be a higher likelihood of a soft landing for the economy rather than a recession.