Australian economic and financial markets update | RBA Chart Pack February 2023

Each month the RBA summarises macroeconomic and financial market trends in Australia by providing a detailed?chart pack.

If a picture paints a thousand words, then this collection of charts should do a pretty good job of painting the landscape as it affects our economy and our property markets.

World Economy

• Australia's economy doesn't operate in isolation, so it's critical to keep track of how the economies of our major trading partners are performing.
• And as you can see from the chart below economic growth is slowing around the world, and the?IMF ?suggests a number of countries could fall into recession in 2023.

• Of course, Australia is not the only country suffering from inflation. As you can see from the chart below it's a worldwide phenomenon made worse in 2022 by various issues caused by the war between Russia and Ukraine.

Australia's Economy

• Australia's economy has performed better than most other advanced economies over the last year, however, the Reserve Bank is hellbent on slowing down our economic growth to rein in inflation.
• After a strong year of economic growth driven by consumer spending and exports from our mining sector, the RBA is now walking a tightrope trying to get inflation under control without slowing our economy too much and causing a recession.
• However, Australia will very likely avoid a recession thanks to significant immigration-driven population growth which will drive up demand for goods and services.

• Of course, inflation was the Buzzword in Australia in 2022 and is set to be the focus of media attention again throughout 2023, but it is likely that it has now reached its peak, but this will only be reported over the next couple of months.
• The Australian Bureau of Statistics reported a 1.9% increase in the CPI in the December quarter. Combined with the strong increases in the first nine months of the year, inflation in 2022 was at the highest rate since March 1990. This reflects a post-pandemic spend-a-thon.

Household Sector

• The following chart shows how the disposable income for Aussie households has dropped over the last year as they have grappled with rising costs.
• Despite the Reserve Bank's best efforts to slow down household spending, we’re still spending up big on discretionary items such as clothes, restaurants, and lifestyle, defying cost of living pressures.
• However the latest retail sales figures fell more sharply than many expected, but this was following a strong Black Friday / Cyber Monday sales boom
• This chart also shows our savings ratio has now dropped to close to pre-pandemic levels as we keep spending our stashed cash to support our lifestyles.

I keep careful track of?consumer confidence ?because it's a good leading indicator of what's ahead for our economy and property markets.

The media's continual barrage of negative news about inflation combined with falling house prices and rising interest rates is having a significant impact on consumer sentiment:

Currently, consumer confidence is at historically low levels, which is one of the reasons our property markets have been slumping.

Obviously, people don't make significant investment decisions when they're not confident about their financial future.

• While rising interest rates and inflation have eaten away at the average household budget, in general Aussies have significantly more equity in their homes than they had three years ago and have considerably more savings stashed in their savings or offset accounts than they had at the beginning the pandemic, three years ago.
• The following chart shows our net wealth position, and that our main assets are in real estate (particularly our homes) and financial assets (including our superannuation.)
• As you can see, the net wealth position of Australian households is high since asset growth has outpaced the increased debt levels, meaning our net wealth position, while falling a little lately, is very strong.
• The?Australian residential property market is valued at around $9.3 trillion , yet there is only around $2.1 trillion worth of debt against this large asset base. In fact, 50% of homeowners don't have a mortgage against their homes.

• We recently experienced a “once in a generation property boom” in 2020 and 2021 where the value of almost every property in Australia increased by 20% -30% and?we have now entered the downturn phase of the housing market and it’s likely that high interest-rate and inflation will keep eating away at the average Australian's household budget for some time making the property less affordable.
• However later this year, when Aussies realise that inflation is under control and interest-rate will no longer rise,?our housing markets will reset and the next property cycle will commence .

• Currently, Australia has a shortfall of housing, which is particularly showing up in our rental markets with historically low vacancy rates and skyrocketing rents.
• During the pandemic, government incentives encourage first-home buyers to into the market, and in last year's budget the government indicated a desire to build around 200,000 new and affordable dwellings each year commencing in 2024.
• The cost of residential construction has risen substantially in the last few years in part because of the lack of available skilled labour and also due to supply chain restrictions.
• This means the cost to build new apartments has risen to such an extent that most developments on the drawing board (see the following chart of dwelling approvals) are not currently financially viable and won’t be built until the market is prepared to pay substantially more than the current prices.
• In other words... there is no end in sight for the undersupply of dwellings.

While the property pessimists are making a fuss about falling housing loan commitments, which are clearly a leading indicator of what's ahead for our property markets, the following chart shows that they are still well above long-term averages.

Business Sector

• Australia has avoided the worst of Covid-19, but now we have new challenges such as the rising cost of living, a war in Europe leading to high energy prices, and a global economy tipping towards recession.
• The near-term business outlook is one of softening consumption and investment growth, tightening government expenditures, and high debt costs.
• This troubled backdrop has been reflected in business investment which seems to be bottoming at multi-decade lows.

Labour Markets

• Australia's unemployment rate is at historically low levels, fuelled by a booming economy and labour shortage.
• The current employment of 3.4% is the best Australia has seen in decades meaning Australians can feel secure about their financial futures.
• While the unemployment rate will rise moving forward due to skilled migrants being imported through immigration. It is likely to remain in the region of 4.5% - an enviable result.

• The labour force participation rate is an estimate of an economy’s active workforce. The formula is the number of people ages 16 and older who are employed or actively seeking employment, divided by the total non-institutionalized, civilian working-age population.
• The participation rate in Australia averaged 63.51% from 1978 until 2022, as you can see from the chart below the participation rate has increased over the last few years as a bigger percentage of Australians have entered the workforce.

• As you can see from the chart below, service-related industries have had significant growth, and in particular, there has been strong growth in the healthcare, accommodation and food services industries.

• Currently, there are around 470,000 jobs advertised, but nobody to fill these vacancies.

• While national average wages have underperformed inflation over the last couple of years, meaning that “real” wages have actually fallen, it’s likely we’ll move into a time when we experience moderate wage increases.

Interest Rates

• Interest rate levels set by the RBA respond to changes in inflation.
• When rates rise, they slow economic growth and discourage borrowing, typically signalling a strong economy. On the other hand, low-interest rates promote economic growth.
• The RBA lifted the cash rate a further 25 basis points, ?to 3.35%, at their February board meeting, continuing what is now the fastest and largest rate hiking cycle on record. The cash rate has jumped 325 basis points since moving off record lows in May last year.

• Despite the sharp rise in interest rates over 2022, home loan arrears remain at post-GFC lows, defying those property pessimists who forecast that significant levels of mortgage stress would lead to forced sales by homeowners who got over their heads in debt.

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