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Business Outlook: Reserve Bank puts the economy on a knife-edge

The March 2023 edition of Deloitte Access Economics Business Outlook report shows the economic environment in Australia is finely poised.

After two further interest rate increases in early 2023 – to go with the eight straight hikes from May 2022 – the Reserve Bank of Australia (RBA) is tempting fate, and Australia is facing the weakest rate of economic growth outside of the pandemic since the recession of the early 1990s.

The downgrade in the growth outlook is centred on Australia’s households and a ‘consumer recession’ is now forecast through 2023, with household spending expected to finish the year below where it started, before an expected return to more solid spending growth through the course of 2024.

At a cash rate of 3.6%, most Australians will be just fine. Many Australians, however, will not. In just 10 months, the cost of servicing an average $600,000 mortgage will have risen by more than $14,000 per year once those rate hikes are fully passed through. But that’s the average, and there are plenty of mortgage holders on either side of that average.

The latest Financial Stability Review from the RBA, released in April 2023, suggested that under fairly typical baseline assumptions for income growth, inflation and unemployment, some 15% of variable-rate, owner-occupier mortgagors will be in negative cash flow by the end of 2023, with many of these borrowers already projected to be in this position. That adds up to at least 300,000 households that may experience negative cash flow, with mortgage repayments and essential living expenses together exceeding household disposable income.

And it’s not just mortgage holders. Renters are increasingly being squeezed by higher rents, with little respite in sight. It’s an issue of supply and demand, but private dwelling investment is forecast to fall rather than increase through 2023, before recovering modestly in 2024.

Construction is expected to commence on only just more than 160,000 dwellings in 2023 and on fewer than 170,000 dwellings in 2024. That result in 2023 would be some 21,000 dwellings below the number that commenced in 2022, and almost 70,000 fewer than the 230,000 dwellings that started construction in 2021.

On these numbers, new housing supply would just barely keep pace with population growth, let alone ease a critical undersupply. In short, Australia is building far too few dwellings and, with a myriad of supply side challenges unresolved, that is unlikely to change in the near term.

With households hurting, dwelling construction in the doldrums and the global environment shaky, Deloitte Access Economics has revised down expectations for Australian economic growth in calendar 2023 and 2024 to just 1.5% and 1.2% respectively. If realised, Australia’s growth will be the slowest outside the COVID-19 pandemic since the recession of the early 1990s and see economic activity per capita flatline.

Chart 1: Quarterly real GDP per capita

Source: Deloitte Access Economics, Australian Bureau of Statistics 
This blog was co-authored by Alex Scaife, a Senior Analyst in the Deloitte Access Economics team.