2023: A year in review
While 2023 has been a sluggish year, parts of the Australian economy have been remarkedly resilient.
This time last year, the outlook for 2023 looked bleak. Year-to inflation had just peaked in December 2022 at 7.8%, the highest since 1990, and the Reserve Bank of Australia (RBA) had lifted rates every month between May and December with few signs of respite in sight.
Fast forward to the end of 2023, and Australia has indeed had a sluggish year. Economic growth has slowed, falling from 3.7% in 2022 to a forecast of less than 2.0% for 2023. Cost of living pressures have been punishing on Australian households and consumer spending has faltered as a result.
Australians have been forced to prioritise essential spending for much of the year, leaving discretionary spending on the chopping block. And some groups, like renters and mortgage holders, have been affected more than others, with rental price increases at record highs and the number of ‘at risk’ mortgage holders continuing to creep up.
Retailers have undoubtedly felt the squeeze this year. Real retail turnover declined for three consecutive quarters between December 2022 and June 2023 (the first time this has happened since 2008). In any case, Australians have had to dig deep into their savings to sustain spending – the household saving ratio fell to just 1.1% in the September quarter of 2023, compared to an average of 6.7% over the decade prior to the pandemic.
Chart 1: Household savings ratio
Source: ABS National Accounts.
Note: The ten year pre-COVID average is calculated for December 2009 to December 2019.
But in better news, parts of the economy have proven remarkably resilient over a difficult year, helping Australia avoid recession in 2023.
One of the key supports to the Australian economy over 2023 has been the faster than expected rebound in overseas migration. In 2022-23, record high net overseas migration added 518,000 people to our population. Migration has been central to government policy this year, with the much anticipated release of the Migration Review in April and the new Migration Strategy just last week outlining significant reforms to Australia’s existing migration system.
The labour market has been another shining light through 2023, remaining more resilient than most expectations. The unemployment rate remained impressively low – between 3.5% and 3.7% for much of the year, and only ticked up to 3.9% in November. And outside Australia, the global economy has proven stronger than many feared, thanks in large part to the economic resilience of the United States.
All of these elements fed into another positive surprise in 2023: Australia’s first budget surplus in 15 years, and a welcome consequence of a number of tailwinds like favourable commodity prices, a strong labour market and that large rebound in migration.
Looking ahead, 2024 may be a slightly better year for households and businesses as inflation falls further and real wage growth catches up, but pressure points still remain.
Economic risks include:
- While inflation continues to moderate, uncertainty about when it will reach the RBA’s target band remains – as does the possibility of further interest rate rises
- Potential future supply shocks pose inflationary risks, whether from disruption to shipping lanes in the Red Sea or ongoing conflict in Ukraine or the Middle East
- China’s economic performance in 2023 was disappointing and reflects big challenges for that country (ranging from debt, to property prices, to its ageing population) and may weigh on economic prospects in 2024.
At the same time, there are also significant opportunities for Australia on the horizon.
Our transition to net zero can provide a wide range of export opportunities if we invest now, and the rise of Generative AI could increasingly be an important means of lifting productivity.
Further policy reform is also on the cards, like the National Strategy to Achieve Gender Equality, which is vital to keep momentum for change going (and particularly after we’ve just had the first female appointments to the roles of Governor of the RBA and Chair of the Productivity Commission).
This newsletter was distributed on 20 December 2023. For any questions/comments on this week's newsletter, please contact our authors:.
This blog was co-authored by Michelle Shi, Economist at Deloitte Access Economics.
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