TORONTO, ON, Sept. 20, 2022 /24-7PressRelease/ — Glenbrook Advisory presents its Australian economic forecast for 2023.
Archie Brook, MD of Glenbrook Advisory based in Glasgow, Scotland, gave us Glenbrook Advisory’s forecast for the Australian economy ahead.
Sharp slowdown in growth expected for 2023.
The Australian economy grew 0.9% in the June quarter for annual growth of 3.6%. For 2023, we expect growth to slow to 1.0%.
This solid growth in the June quarter was driven by strong household spending (around 54% of GDP) following a rebound in spending as the economy reopened, particularly discretionary services. This was accompanied by a substantial decline in the still high savings rate, which freed up room for more spending.
We had anticipated growth in household spending of 2.6%, against an actual result of 2.2%. but spending growth in the March quarter has been revised up from 1.5% to 2.2%, confirming our positive view of the household sector.
The detail of household spending was also in line with our thinking – the savings rate fell from 11.1% to 8.7%, freeing up $7.6 billion to largely fund the $10.8 billion. additional expenses during the quarter. Discretionary services soared in the quarter – transportation services up 37.3%; hotels, cafes and restaurants up 8.8% and leisure and culture up 3.6%.
Residential construction contracted by 2.9% and non-residential construction (private and public) fell by 1.8%. This unexpected contraction in construction (subtracted 0.3ppt from growth in the quarter) represented a recovery of around 0.6ppt from our previous one.
Looking ahead, we expect the growth rate of consumer spending to slow in the September and December quarters. The reopening effect will start to fade and the recent interest rate hikes will start to hit households.
There were two rate hikes in the June quarter (0.25% in May and 0.5% in June). The impact on household finances of these rate increases in the June quarter will have been minimal. But by the September and December quarters, which saw rate hikes of 0.5% in July; August; and September, the impact will be considerable.
We expect further increases of 0.25% in October; November; and December with a final increase of 0.25% in February. Although about a third of households hold a mortgage; a third are tenants; and a third own their property, rate hikes impact all groups through a range of channels – borrower cash flows; the indirect impact of investors passing on higher financing costs to tenants, especially as rental vacancy rates are near record lows in many cities and regions; the wealth effect of falling house prices on freehold owners and borrowers; and the recent collapse in consumer confidence.
Nationally, property prices have already fallen 4%, with our forecast of another 12% likely to continue through the second half of 2023. The contraction in construction in the June quarter has attributed to weather delays and supply constraints. We expect to see construction increase slightly in the second half of 2022, reflecting the build-up in the construction pipeline. Further contraction can be expected in 2023 as rising rates weigh on demand, narrowing the pipeline. Reflecting these changes, we have lowered our growth forecast for 2022 from 4.4% to 3.4%.
Consumer spending growth in 2022 is expected to slow from 4.4% in the first half to 1.8% in the second half. But with the expected recovery in the construction cycle, we see homebuilding rising 5.4% in the second half of this year, a reversal from a 3.4% contraction in the first half of 2022. Related recoveries are expected for commercial construction and engineering.
Overall, with the expected near-term recovery in the construction cycle partially offsetting the slower pace of consumer spending, we expect growth in the second half of 2022 to hold at roughly the same annualized pace of 3.2% than that seen in the first half – albeit under conditions in the last quarter of 2022 will likely be more subdued than those in the September quarter. We have not changed our pessimistic view of growth in 2023.
We expect GDP growth in 2023 to slow to 1.0%, with private domestic demand growth slowing to 0.2% (a sharp deceleration from an expected 5.4% expansion in 2022) . We cannot rule out a negative quarter of growth in 2023 but do not expect a classic recession. Consumer spending growth is expected to slow from 6.3% in 2022 to 1.2% in 2023; business investment growth will slow from 5.8% to -1.0%; while housing construction growth will slow from 2.0% to -4.0%.
This slowdown in consumer spending growth will include a further very modest decline in the savings rate from 3.6% by the end of 2022 to 2.3% through 2023. We estimate that the savings rate equilibrium is around 6%, so reductions in the savings rate below this level will be associated with households drawing down some of their accumulated excess savings.
We project that the stock of excess savings accumulated during the pandemic, which currently stands at around $275 billion, will fall to around $200 billion by the end of 2023.
The economy in 2023 will suffer the full cumulative effect of the rise in the cash rate from 0.1% in April 2022 to 3.35% in February 2023. Other negative factors for growth in 2023 are: a complete disappearance of the “reopening” effect; a further limited decline in the savings rate below equilibrium, as households continue to tap into this excess savings, albeit at a slower pace than in 2022; an increase in the unemployment rate from 3.0% to 4.2%; and a drop in real estate prices of around 16%.
The slowdown in 2023 will be necessary to contain any buildup of “inflationary psychology” where businesses expect to be able to raise prices and households adjust to the expectation of outsized wage increases. Sluggish demand will mean that business confidence in their ability to continue to raise prices will dissipate and we can return to a period of steady inflation.
If we are wrong and demand is much more robust than we expect in 2023 (perhaps the “regular keel”), the risk is that increases will be needed much later in the year.
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