Making Sense of It All - The Economic Outlook

It is Feb 2023 and the RBA is predicting that inflation and GDP will not be achieving "target levels" until some time in 2025. That means it will be somewhere between 20 months and 34 months before the expert decision makers are predicting we will be out of the woods.

Edit: Westpac expects interest rates to hit a peak of 4.1% by May and stay there until the first quarter of 2024, then slowly come down as inflation hits target of 2-3% in 2025

Times of economic uncertainty tend to flood our timelines with fiscal content, journalists speak of jobs and wages and housing, economists offer predictions and warnings, ministers urge tightening of belts and rationalising of budgets, professors bring out red pens and draw graphs with blue lines and the really smart ones mention deficits and surpluses and domestic balance sheets.

The problem is that everyone who speaks about the economy seems to have a different opinion, and different perspective. Inconsistency in reporting and opinion pieces about the economy is confusing to me, normally I enjoy the grey areas that sit between the facts, but come on, not when it might actually affect me.

Here's three examples of this inconsistent and confusing reporting:

"Australia to flirt with recession this year" was published 3 days ago:

"Record fall in inflation expectations" was 2 days ago:

And "An economic fairytale" was yesterday:

They all cite different sources, delivering different predictions, for different reasons - so technically they are all correct. But what does it actually mean??

I took some meaty sources, starting with Australia's economy and did the TL;DR for you on each.

Interesting as we head into the 3rd month of Q1 to reflect on the predictions made since the end of last calendar year.

Australian Bureau of Statistics (07.12.22):

By way of context, here is the ABS's "Top 12" which all sounds terribly encouraging, things that should be up are up and things that should be down are down, but some things that should be warm are cooling a bit and some things that used to be fantastic are now just ok.

Reserve Bank of Australia (Feb 2023)

Now strap yourself in for the main event, the grandly titled Reserve Bank Of Australia has a lot of content this month that I have tried to distil right down without losing the essential facts as follows:

1. Overview Summary

Inflation is the worry and consequently the priority for the RBA board, it's too high and won't be down to target levels (target is between 2 and 3 per cent) until mid-2025.

The RBA board is raising interest rates to "stop inflation becoming entrenched" and believes this approach achieves a better balance of supply and demand in the Australian economy. (This pain is painful but it's less painful than the hypothetical pain might be if we didn't inflict actual pain.right now Which is an interesting concept - which is worse, horrific pain that's only possible, or less horrific pain that's real? The utilitarians would have a field day here.)

"The Board expects that further increases in interest rates will be needed to ensure that the current period of high inflation is only temporary. "

2. Economic Outlook Summary:

GDP growth slowed during 2022 (2¾ per cent over the year), slower than expected and will slow further to 1½ per cent over 2023, and remain around that rate before picking up in mid-2025.

Headline consumer price inflation was 7.8 per cent over 2022. Inflation is forecast to decline to around the top of the 2–3 per cent target band over coming years.

Growth in household consumption and saving will slow over 2023 (which doesn't mean it will stop). The household saving ratio is forecast to continue to decline over the next year, before increasing to around its pre-pandemic average.

The outlook for investment remains positive - but not housing investment, which looks like it will become tricky once the 12 months it will take to clear the pipeline of work is completed. 2024 looks like it will be a tough year for residential construction. 2025 might pick up especially in apartments, due to the typically 2 year lag between approvals & completions for apartment buildings.

3. Drivers of Inflation in Australia

(also known as - why is this happening to me?)

• "Supply shocks" (supply chain impacts of COVID & Ukraine war, as well as domestic weather events and their impact on logistics) account for at least half of the increase in inflation in Australia
• The rapid rebound from COVID meant demand outstripped supply and led to price increases which further created upward pressure on inflation.

OECD Nov 2022

(The Organisation for Economic Cooperation and Development)

Thank you to the RBA's excellent website, now let's head over to the OECD - albeit 3 months old:

Australia projection note OECD Economic Outlook November 2022

In a nutshell, in November the OECD was predicting things would be a bit worse than the RBA have just predicted (in Feb) they will be.

• The RBA has tightened monetary policy in response to rising inflation, raising its cash rate from 0.1% to 2.85% in the past six months. Further increases in the cash rate will be necessary to bring inflation back to the target range of 2-3%, with the projections assuming that the cash rate will peak at 3.6% in the first quarter of 2023 and remain there until well into 2024.
• Real GDP grew 4% in 2022, and is projected to slow to 1.9% in 2023 and 1.6% in 2024.
• Tighter financial conditions and elevated inflation will weigh on consumption and investment. Dwelling investment is also projected to slow over the projection period in response to declining house prices.
• With a very tight labour market, wage growth is expected to pick up further in the near term, but it will ease as unemployment edges up in the second half of 2023.

Now I have something of a digest of institutional & investment comment on what's happening and what to expect)

KPMG Q4 2022

Deloitte Jan '23

(Love the headline "Australians at the Reserve Bank's mercy")

Australian economic growth is expected to slow dramatically throughout 2023.

The total volume of consumer spending in Australia is expected to fall over the next six months, even as higher prices lift the value of spending.

Deloitte Access Economics expects economic growth of just 1.7% in the 2023 calendar year

Any further increases in the cash rate beyond the current 3.1% could unnecessarily tip Australia into recession in 2023.

There is an Everest of evidence to suggest interest rates should stay on hold from here.

JP Morgan Business Leaders' Outlook Jan 2023:

Quite an interesting read as it also talks to how companies are choosing to adapt to potentially recessionary pressures.

46% of Australian business leaders said they expect a recession in 2023.

Two-thirds of the companies experiencing inflation said energy prices are their biggest challenge; next in line are the increased cost of capital (61%) and supply chain issues (60%).

Despite the inflationary challenges, the majority of leaders are confident in their own companies. A commanding 94% expect their revenues to increase or remain the same in 2023.

Westpac Weekly 27.02.23: 

"Since October we have consistently held the view that the cash rate would peak in May at 3.85%. We have lifted our forecast terminal RBA cash rate from 3.85% to 4.1%. We still see the date of the peak as May 2023 but now see that peak as slightly higher."

Westpac expects that the next move in rates beyond mid–2023 will be the beginning of an easing cycle in the March quarter 2024.

We expect the economy to stagnate in the second half of 2023, there will not be sufficient progress in bringing inflation into line with the target before the end of 2023 to accommodate earlier rate cuts.

We expect inflation in Australia to still be around 4% by end 2023, falling to 3.0% by end 2024, allowing a policy response to a stagnating economy by the first quarter of 2024.