September 2023 edition of Deloitte Access Economics’ Business Outlook report shows that against a backdrop of global uncertainty, the Australian economy remains on a knife edge. A per capita income recession, a retail recession, and a housing crisis have contributed to significant pain across the economy.
But as tough as it’s been, it looks like we might get through the year without tipping into an actual economic recession.
In the retail sector, trend (nominal) retail growth has slowed to just 1.3%, the lowest trend growth recorded (back to 1982). Consumer confidence remains extremely fragile, near its all-time low point, and business failures (centred on construction but also affecting accommodation and food services, manufacturing, and retail trade) have also been on the rise through 2023.
In the current economic environment, and after 400 basis points of rate rises since May 2022, the Reserve Bank has paused at the last four meetings. Deloitte Access Economics would encourage that pause to continue, even in the face of some nervousness around oil prices and wages edging up. Australia’s CPI growth is on a downward trend, thanks in small part to the RBA squashing domestic demand, but mostly due to the unwinding of supply chain pressures which pushed prices up in the first place. As price growth moderates, we will start to see (modest) real wage growth again.
Chart 1: Wages and Inflation
Source: Deloitte Access Economics, Business Outlook.
And as the business cycle passes its low point and starts turning up again, a shaken-up Australian economy shouldn’t just navel gaze on the cost-of-living crisis of today. Instead, Australia’s business sector should also be looking to 2024 as a year which provides growth opportunities.
Business investment looks to be on a slowing trend in these forecasts, growing by just 2.9% in 2023-24 and 1.6% in 2024-25. But beyond the short-term economic cycle, there are significant opportunities (and some challenges) for Australia’s businesses, through the spread of AI, and from the transition to net zero emissions by 2050. Lifting business investment and productivity remains our biggest challenge, especially in light of geopolitical uncertainties and the refashioning of the geopolitical architecture.
Investment in Artificial Intelligence (AI) is likely to benefit the overall Australian economy by providing an enormous opportunity to lift productivity growth. Some industries, such as finance, ICT and media, professional services, education, and wholesale trade could be turbocharged as businesses adopt AI (Generation AI). However, broader business investment is likely to require government to play a critical role.
Government is likely to play an important role in enabling business investment. Australia’s federal and state governments have the potential to make a difference in this economic transition – but not by doing nothing. Expected government investment growth of 7.5% in 2023-24 will play a part, although only if that investment is well targeted.
For instance, governments can support and enable the massive business investment we will need for Australia’s economy to decarbonise and restructure. Over time, Australia’s economy stands to be $435 billion better off by capitalising on the global race to achieve net zero emissions (All systems go: powering ahead).
Though the September quarter of 2023 is likely to be toughest period for the Australian economy, it is also likely to be an inflection point and an opportunity to turn our attention to more important topics such as encouraging competition, sparking innovation, and building an elite national skills base.
This newsletter was distributed on 18th October 2023.
This blog was co-authored by Lester Gunnion, Manager at Deloitte Access Economics.
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