April 23, 2024: Inflation may be trending lower, but nearly four months into 2024, Australia's economy is in the doldrums. While population growth is driving the economy, geopolitical turmoil and sluggish housing construction are complicating the picture for data-dependent central banks, slowing the turnaround to growth.
Launching the March 2024 edition of its flagship Business Outlook report, Stephen Smith, partner at Deloitte Access Economics and lead author of the report, said: “It’s been six months since the RBA last raised interest rates and inflation has been falling slowly and steadily, but official data shows that the labour market is yet to deteriorate.
“So what happens next? The second half of 2024 will see the arrival of revised third-stage tax cuts and gradual improvements in real wages, which will provide significant relief to households. At the same time, the growth outlook is clouded by weakening business investment, a sluggish homebuilding sector and an uncertain global situation.
“The case for rate cuts is growing, but there is significant debate over the timing and extent of any cuts. Recognizing that a cautious Reserve Bank of Australia will likely want to see Q9 inflation data in late October before pulling the trigger on any rate cuts, our forecast places the first rate cut in November this year.”
The RBA is also keeping a close eye on the unemployment rate, with Deloitte Access Economics predicting that economic headwinds will hit the labour market in 2024, with more than 100,000 Australians out of work by the end of the year and the unemployment rate rising to 4.6%.
“Labor market data released last week indicates that unemployment is rising again,” Smith said. “We believe the labor market is the bigger concern, and wage growth (and therefore services inflation) is less of a concern.”
“But the big concern is the housing crisis. Australia is not building enough homes to keep up with population growth. This isn't just the case since the pandemic, but has been the case for many years prior to that.”
“Australia's population grew by 172,000 in the September 2023 quarter, further increasing demand for housing, but only 44,000 homes were completed in the same quarter. Supply has not kept pace with the demand driven by population growth, let alone addressing the structural supply shortfall in the market.”
“The Federal Government's target to build 1.2 million new homes over the next five years is ambitious, especially given that the ramp-up in the pace of construction is off to a slow start.
“The number of homes currently under construction in Australia is almost two-thirds higher than the pre-pandemic decade average. But this is not good news. This increased level of activity represents a backlog of half-completed homes caused by the pandemic and partly explains the recent low housing starts.
“The construction industry is experiencing delays in completing existing projects and struggling to start new builds. We expect the pace of housing starts and subsequent home completions to accelerate over the next 18 months, but this is not a short-term panacea. Eliminating Australia's housing crisis will take years and, unfortunately for many, will require higher house prices in the short term.”
“Land, materials and labour costs remain high, while recent bankruptcy rates show that builders need higher profit margins to deliver the significant increase in housing that governments and communities desperately need. This problem will probably get much worse before it gets better.”
“However, despite these challenges, the outlook for the Australian economy is brighter for the second half of the year, with cost of living pressures expected to ease and solid real wage growth providing a boost to household finances, paving the way for a recovery in consumer spending.”
States and territories
“Outlooks vary across Australian states and territories due to their different exposure to cost of living pressures,” Mr Smith said.
“Rising interest rates will hit households hard in NSW and Victoria due to the size of their mortgages, but improving conditions towards the end of the year, including tax cuts and potential interest rate cuts, will support demand.”
“Relatively strong population growth and solid merchandise exports will support growth in Queensland, while public sector demand is expected to drive economic growth in South Australia with slower population growth weighing on the outlook for private spending.”
“Western Australia is set to accelerate growth in 2024-25 as strong domestic demand offsets a forecast decline in net exports. Growth is also expected to recover in Tasmania, but it will lag other states and territories as low population growth limits private demand.”
“Business investment is forecast to increase in 2024-25 and the Northern Territory economy is expected to return to growth, with strong growth in public sector spending combined with a recovery in household demand expected to drive economic growth in the ACT in the next financial year.”
Key forecasts: Deloitte Access Economics Business Outlook, March 2024