Kickstart 2023 with an economic round-up

IBA’s Principal Economist, Siddharth Shirodkar, sums up 2022 to prepare you for the year ahead.

Unprecedented health, geopolitical, climactic, and economic challenges continued in 2022 – for people globally as well as First Nations families in Australia – including:

•   COVID-19 related supply disruptions, currently most apparent in China, along with infecting around 11 million Australians and sadly as of December 2022, roughly 30 Australians a day were dying from the virus.
•   Ongoing conflict in Ukraine, which presents global economic challenges, such as higher energy and grocery costs, in addition to the significant humanitarian consequences.
• The world continues to experience the effects of climate change, and Australia has experienced its fair share including destructive floods in south-eastern Australia impacting on some of our key food growing regions, putting further pressure on grocery prices (recall a single lettuce costing $12 not so long ago).

Noting the significant human cost of the above challenges, they have each also had a significant negative impact on economic supply, contributing to very high inflation. Annual Australian inflation reached 7.3% in September quarter 2022, compared with 3% just 12 months prior

INFLATION – what does it mean?

Because wages in Australia have not kept up with inflation (see Chart 1), it means the average Australian household cannot afford to buy as much as they did 12 months ago. This has sparked the cost-of-living crisis many families are facing.

The impact is particularly hard-hitting for lower-income families, who spend a larger share of their income on groceries, housing, and energy costs, which have grown faster than the costs of other goods and services.

The house price growth we saw in 2021 loosened slightly in 2022 across the country, particularly in Sydney and Melbourne. But some property prices remain at historically high levels, including in many regional areas, with current property prices sitting at over 8 times the average Australian income, compared to between 6-7 times prior to the pandemic.

To tackle growing inflation and cost of living pressures, the Reserve Bank of Australia (RBA) quickly raised the cash rate, from the historic low of 0.1% in April 2022 to 3.1% in December 2022.

Many households are feeling the effects of higher interest rates, including IBA home loan customers who have been with us for many years. IBA passes on interest rate increases to align with market conditions and lessen the shock when our home loan customers are ready to refinance with mainstream banks.

To support our customers who were also affected by the floods, IBA offered access to emergency flood relief grants of $2,000 (home loan customers) and $5,000 (business loan customers), with applications open until 16 June 2023.

What do we expect for 2023?

We anticipate that interest rate rises will continue and, as a result, are expected to slow inflation in 2023 and cool the property market. Supply disruptions are also expected to ease as the world adjusts to a ‘new normal’ – although, given the sizeable evolving outbreak in China, the world’s manufacturing hub, that may take longer than previously anticipated. More recent flooding events across large parts of Australia’s west coast, as well as in the NT and southern Australia, will also result in supply disruptions for those communities, and may put further pressure on inflation, in addition to the significant pain families and communities are currently experiencing as clean-up gets underway.

Unless household wages grow rapidly, the price increases of 2022 will be baked into our household spending. As such, the cost-of-living burden that many families are facing may not necessarily ease for some time.    

There is a silver lining. Australia is enjoying a historically very low unemployment rate (3.4% as of November 2022). Further, 13.8 million Australians are now employed, more than any time in our past. Historically high job vacancy rates continue across many industries. Since the level of overseas workers has not returned to pre-COVID levels, it has created greater opportunities for more local people to find work.

While labour market conditions are strong for many Australians, that does not take away from the structural challenges of discrimination that many First Nations people and other marginalised groups face when looking for work. Without addressing the critical worker shortage and the structural barriers that many still face when trying to find work, employers will continue to experience significant challenges growing their business in 2023.

The government’s forecast for Australia’s economic growth in 2023-24 is around 1.5%, which is less than expected for 2022-23.

OUR CUSTOMERS – pulling it all together

For IBA’s business customers and investment co-investors, finding unique ways to employ more people will be critical to ensure ongoing growth.

First Nations businesses are experts at finding, supporting and retaining Aboriginal and Torres Strait Islander workers, creating the right environment to thrive and grow.

IBA’s Impact Report 2021-22 shows just how committed First Nations businesses are to First Nations employment. Initiatives that train people outside of the labour force to enter work will become increasingly critical to maintain a competitive edge.

Many of IBA’s home loan customers will face higher living costs and interest rates, and it is important to appropriately budget for that (check out IBA’s workshops on budgeting and understanding credit for more info).

Finally, as we start this new year, we’d like to thank our amazing customers for continuing their journey with IBA. We hope 2023 brings you, your community and your family great new opportunities to own your future.

Watch out for more of these updates from IBA as we feature regular economic updates to keep you informed and aware of what’s happening in Australia and around the world.

The information contained in this material is general in nature and not tailored to your particular circumstances, objectives or needs. If you are eligible and decide to apply for products or services from IBA you should obtain independent financial and legal advice before signing any documentation or making any significant financial decisions and you should rely upon your own independent advice and inquiries. While IBA has no reason to believe that the information in this material is inaccurate, the truth or accuracy of that information cannot be warranted or guaranteed and may have changed since it was prepared. IBA takes no responsibility for any damage or loss suffered by you in relying on the information in this material.