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Deloitte Access Economics Business Outlook

Disruption, delays and data – the economic waiting game

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23 APRIL 2024: Inflation may be on the decline, but nearly four months into 2024 Australia’s economy is in a holding pattern. While population growth is driving the economy forward, geopolitical disruption and stalling homebuilding are complicating the picture for a data dependent central bank and delaying a pivot to growth.

Releasing the March 2024 edition of the flagship Business Outlook report, Deloitte Access Economics Partner and report lead author, Stephen Smith, said: “It’s been six months since the RBA last hiked interest rates, inflation is slowly and steadily receding, but official data suggest the labour market is yet to deteriorate.

“So, what comes next? The second half of 2024 will bring the revamped Stage 3 tax cuts and gradual improvements in real wages, much to the relief of households. At the same time, the outlook for growth is clouded by fading business investment, a housing construction sector spinning its wheels, and a global environment that’s uncertain at best.

“The case for lower interest rates is growing, but there is significant debate about the timing and extent of rate cuts. Our forecasts now include a first rate cut in November this year, based on an acknowledgement that a cautious RBA will likely want to see the September quarter inflation data, released in late October, before pulling the trigger.”

The RBA is also keeping a close eye on unemployment. Deloitte Access Economics expects economic headwinds will finally take their toll on the labour market in 2024, putting more than 100,000 Australians out of work and increasing the unemployment rate to 4.6% by the year’s end.

“Labour market data released last week shows unemployment is on the rise again,” Smith said. “We see the labour market as more of a concern and wage growth (and therefore services inflation) as less of a concern.

“What is a significant worry, however, is the housing crisis. Australia has not been building nearly enough homes to keep pace with population growth. That’s been true not just since the pandemic but for many years prior to that.

“The 172,000 people added to Australia’s population in the September quarter of 2023 further increased housing demand, while in the same quarter only 44,000 dwellings were completed. Supply is failing to keep pace with population-driven demand let alone address the structural undersupply in the market.

“The Federal Government’s target of building 1.2 million new homes over the next five years is ambitious, particularly given any increase in the pace of construction is off to a slow start.

“The number of houses under construction in Australia currently is around two thirds higher than the average seen over the decade prior to the pandemic. But this is not a good news story. That elevated level of activity represents a pandemic-induced backlog of half-finished homes, and partly explains recent low levels of dwelling commencements.

“The construction industry, held up completing existing projects, is struggling to move onto starting new builds. We expect that the pace of dwelling commencements and, subsequently, dwelling completions will pick up over the next 18 months, but it will be no short-term panacea. Correcting Australia’s housing disaster will take years and, unfortunately for many, will require higher house prices in the near term.

“The cost of land, materials and labour will stay at higher levels, while recent insolvency rates suggest builders will need bigger profit margins if they are to deliver the significant lift in dwellings that governments and the community are crying out for. In all likelihood, this is a problem that will get quite a lot worse before it gets better.”

“Yet despite these challenges, the outlook for the Australian economy is more promising in the second half of the year. Cost of living pressures are expected to subside and we should see firmer real wage growth lift household budgets and pave the road for a recovery in consumer spending.

States and territories

“Across Australia’s states and territories, the outlook is varied, in part because of different levels of exposure to cost of living pressures,” Smith said.

“Larger mortgages in New South Wales and Victoria mean rising interest rates hit households harder, though improving conditions towards the end of this calendar year, including tax cuts and the potential for interest rate cuts, will help to support demand.

“In Queensland, growth will be supported by relatively strong population growth and solid commodity exports, while public sector demand is expected to drive economic growth in South Australia as modest population growth weighs on the outlook for private spending.

“Strength in domestic demand will offset a forecast decline in net exports, setting up Western Australia for accelerating growth in 2024-25, and growth is expected to rebound in Tasmania, but still trail other states and territories as low population growth limits private demand.

“Business investment is projected to ramp up in 2024-25, returning the Northern Territory economy to growth, and strong growth in public sector spending, combined with a rebound in household demand is expected to drive economic growth in the ACT in the coming financial year.”

Key forecasts: Deloitte Access Economics Business Outlook, March 2024

Business Outlook is a quarterly publication presenting detailed economic forecasts and commentary to help understand the economic forces shaping the business environment. The forecasts cover a detailed assessment of the national economy, world growth prospects, each of Australia’s states and territories, and industries.