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Disruption, delays and data – the economic waiting game

Geopolitical disruption and stalling homebuilding are complicating the picture for a data dependent central bank.

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.

It has been six months since the Reserve Bank of Australia (RBA) last hiked interest rates. Inflation is slowly but steadily receding, and 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. The latest edition of Deloitte Access Economics’ Business Outlook, relased Tuesday, forecasts 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. Deloitte Access Economics sees 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 new 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. 

Chart 1: Dwelling commencements and population change 

Source: Australian Bureau of Statistics, Deloitte Access Economics

The construction industry, held up by completing existing projects, is struggling to move onto starting new builds. The pace of dwelling commencements and, subsequently dwelling completions, is expected to 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. 

This newsletter was distributed on 23rd April 2024. For any questions/comments on this week's newsletter, please contact our authors:

This blog was co-authored by Alex Scaife, Manager at Deloitte Access Economics

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