Economic trends and predictions: What can Australia expect for the remainder of 2023?

The World Economic Outlook April 2023 forecasts that global growth is predicted to decrease from 3.4% to 2.8% in 2023, with advanced economies experiencing a more significant slowdown. 

If financial sector stress worsens, global growth could decline further. Although headline inflation is set to fall, due to lower commodity prices, core inflation is expected to decline slowly, and may not return to target until 2025.

While the IMF expects Australia’s real Gross Domestic Product (GDP) will sink from 3.7% in 2022 to 1.6% in 2023, the peak financial body suggested Australia’s outlook remains strong.

“The IMF forecasts the Australian economy will grow by 1.6% in 2023. This means Australia will again outperform other advanced economies, which are expected to grow by an average of just 1.3%. This follows Australia’s solid 5.2% growth in 2021 and an estimated growth of 3.7% in 2022. 

As an exporting nation, our outlook partly reflects the prosperity of our major trading partners. India, China and the ASEAN-52 economies all expect to register solid economic growth in 2023.”

Source: IMF World Economic Outlook April 2023

The latest economic outlook report for May 2023 states that the global economy has been severely impacted by the COVID-19 pandemic, with growth expected to remain moderate over the next few years. Australia’s economic recovery post-pandemic has been stronger than expected, with increased consumer and business confidence leading to higher employment rates. However, inflationary pressures continue to be a concern, with high energy and commodity prices contributing to higher inflation rates.

Goods prices have accounted for most of the disinflation so far and this is forecast to continue over 2023 as the resolution of supply disruptions flows through to prices paid by consumers. By contrast, services and energy inflation remains strong and this is expected to continue in the near term.

The RBA forecasts that economic activity will remain subdued through 2023, owing to higher interest rates, increased cost of living and declines in household wealth. The pace of growth is expected to increase gradually over the next two years as these headwinds fade.

GDP growth is expected to slow to around 1¼ per cent over 2023.

Professional services firm KPMG recently released its Australia Economic Outlook: Q1 2023 report, which predicts Australia will experience a slowdown in economic activity, although there is no expectation that we’ll enter a recession over the forecast period.

Following an upswing in production through 2022, there has been an increased demand for additional workers. However, challenges in accessing visas, affordable international flights, and competition for skilled migrants has led Australia to rely mostly on its own labour pool to fill jobs. 

This has resulted in a record-low unemployment rate and high participation rate, delivering wages growth not seen since in more than a decade. While policymakers initially viewed the increase in wages positively, there are now concerns about a potential "wage-price" spiral, which could worsen inflationary pressures in Australia.

“The dice will be loaded for the next couple of RBA meetings and any upside surprises on activity and inflation may make the market question whether the opportunity for the RBA to engineer a soft landing has been lost.”

Source: KPMG Australia Economic Outlook: Q1 2023 report

Deloitte Access Economics’ March 2023 edition of its flagship Business Outlook report reveals that Australia is facing the weakest rate of economic growth outside of the pandemic since the recession of the early 1990s.

Deloitte’s report suggests that while the majority of Australians will be unaffected by the current cash rate, a significant number of individuals will face challenges. Under fairly typical baseline assumptions for income growth, inflation and unemployment, some 15% of variable-rate, owner-occupier mortgage holders will be in negative cash flow by the end of 2023, with many of these borrowers already projected to be in this position.

Private dwelling investment is forecast to fall rather than increase through 2023, before recovering only modestly in 2024. This year, construction is expected to commence on the fewest dwellings in more than a decade and almost 70,000 below the level of commencements recorded in 2021. On these numbers, new housing supply would just barely keep pace with population growth, let alone ease what is a critical undersupply.

Given these poor economic circumstances, Deloitte has revised down expectations for Australian economic growth in calendar year 2023 (1.5%) and 2024 (1.2%).

“Our view remains unchanged - the additional 50 basis points of increases earlier this year were unnecessary, and have prompted a further downgrade in Australia’s growth outlook.

"That downgrade is centered on our households, and a 'consumer recession' is now forecast in 2023, with household spending expected to finish the year below where it started."

Despite rigorous analysis of trusted data sources and evidence-based forecasts, the future of Australia's economy remains tentative and irresolute.

While our domestic economy is expected to outperform other advanced economies, significant challenges persist including borrowers struggling to meet loan repayments, rising interest rates, and a potential consumer recession. 

Most predictions anticipate a slowdown in Australia's economic growth, and concerns regarding inflation and declining housing investment are a consistent theme throughout most forward estimates.

In these circumstances, it’s important for all Australians - particularly younger generations - to improve their financial literacy in order to better understand how monetary policy and budgetary measures affect their future.