Australia narrowly avoided recession this year. Here’s what these experts think will

Fears that Australia would enter a technical recession during 2023 didn’t eventuate.

But that’s all thanks to a much higher than anticipated migration surge, as more than half a million people moved here during the year, bumping up total demand even as per capita consumption fell.

For many, life in 2023 certainly felt recession-like as Australians faced more interest rate hikes, a rising tax bill and a still-increasing cost of living that again outpaced wage growth.

Yet Australia’s unemployment rate remained virtually unchanged near 50-year lows and property prices shrugged off rate rises to resume growing back to record highs.

As official inflation numbers pulled back from the peak of 7.8 per cent we had coming into 2023, GDP data confirmed the economy was slowing sharply.

We asked four leading economists what they thought could happen in 2024.


Interest rates will be cut — but there might be another hike

The Reserve Bank lifted the cash rate five times in 2023, raising it from 3.1 per cent to 4.35 per cent by the end of the year.

It followed the 3 percentage point increase the bank implemented the year before and led to protests outside the RBA’s Sydney headquarters.

A group of people standing with umbrellas and signs on a wet concrete floor outside a building in the Sydney CBD.

Rising interest rates continued throughout 2023, prompting some to protest outside the Reserve Bank.(ABC News: Dan Irvine)

The bank paused hikes again in December and economists are mixed on whether there will be another hike to come in the new year.

“I think the last interest rate hike in November has led to a bit of a perhaps change in expectation that maybe we haven’t seen the peak in interest rates in Australia,” AMP’s deputy chief economist Diana Mousina said.

Like many of her peers, this time last year Ms Mousina didn’t foreshadow the five interest rate hikes the RBA put through this year.

“I’ll be the first to say that we were too optimistic on the rate hike view, and by optimistic I mean we underestimated how far interest rates would go in Australia,” Ms Mousina said.

“Given that the RBA does sound so hawkish, I think that we need to be aware that there is a very good chance of another rate hike in the next few months.”

However, after GDP data published at the start of December came in much lower than expected and showed the economy grew 0.2 per cent in the three months to September, economists generally expect the central bank will begin cutting rates next year.

“[Australians] will be a bit more pleasantly surprised than negatively surprised over the course of 2024,” Westpac group chief economist Luci Ellis said.

She should have better insight than most.

Until October 2023, Ms Ellis was an assistant governor at the RBA, responsible for its economic forecasts, before she left to take up her new role at Westpac.

A womna with short grey hair, wearing a dark suit jacket over a whit sift, looks intently into the camera.

Westpac group chief economist Luci Ellis predicts the RBA will cut the official cash rate in 2024.(
ABC News: John Gunn

“At some point through 2024, towards the end of the year, probably, they [the RBA] will have a bit more confidence that inflation is going to be back within the band by 2025 and they’ll start to be considering at what point they can take away some of that restrictive nature of policy,” Dr Ellis explained.

“They’re not thinking about it now, at the moment it’s the last thing on their minds, but by the time we get to this time next year, I think that will be much more on the table.”

Dr Ellis predicts “one or two” rate cuts by the end of 2024.

‘Slow grind’ for inflation to fall to RBA’s target

Australia’s December quarter 2022 inflation rate (published in January 2023) came in higher than expected at 7.8 per cent, on an annual basis, seasonally adjusted.

The latest Consumer Price Index (CPI), Australia’s key inflation measure, was 4.9 per cent for the year to October, based on the partial monthly indicator.

The rate is still roughly double the RBA’s target of between 2-3 per cent.

A woman with a trolley stands in a stocked supermarket aisle.

The weekly grocery shop cost more throughout 2023.(
ABC News: Danielle Bonica

“I think it is going to be a slow grind, I think it is going to take quite some time for inflation to come back to the RBA’s target,” said HSBC Australia chief economist Paul Bloxham.

“The thing that brought inflation down this year was a lot of those supply-related disruptions associated with the pandemic and associated with the Russia-Ukraine war, got worked through.

“So, oil prices, food prices, shipping costs coming down, and the availability of manufactured goods, meaning goods prices came down.

“But now the slow grind is because the bit of inflation that’s still too elevated is services inflation — it’s rent and electricity, and services generally and a large part of the input there is workers and therefore wages. It’s going to be slower for those things to come down.”

The RBA also doesn’t think inflation will be in its target band until 2025, but Ms Mousina has a different view.

“I still think that the RBA is overestimating their inflation forecasts and that Australian inflation will actually come down a lot quicker in 2024,” she said.

The migration rate that supported the economy will ease

More than half a million people migrated to Australia in 2023.

“The increase in some of those arrivals has been extraordinarily high, and much higher than where Treasury was forecasting them to be,” Ms Mousina said.

“That gives you this base level of economic growth that translates through into all parts of the economy, into consumer spending, into home prices.”

Put simply, more people means more spending in the economy, with more people working, earning a wage and paying taxes, as well as more people renting or buying homes.

A woman with long brown hair, wearing a cream jacket over a brown top, has her arms folded and smiles to the camera.

AMP deputy chief economist Diana Mousina says migration was one of the key drivers of economic growth in 2023.(
ABC News: John Gunn

Ms Mousina said it was only because of that higher migration that Australia’s Gross Domestic Product (GDP) stayed positive and we avoided a technical recession, often defined as two consecutive quarters of falling GDP.

However, even with the population boost, she noted an economy growing at 2.1 per cent in the 12 months to September 30 “is considered weak for Australia”.

Moreover, it’s unlikely half a million more people will move here next year, so the GDP numbers in 2024 could be worse.

“You’ve got to remember, this is a ripple effect from COVID,” Dr Ellis explained.

“We don’t expect population growth in 2024 to be anywhere near as strong as it was in 2023.”

The federal government recently forecast net migration of around 375,000 this financial year, falling again to 250,000 the following one, which is around the levels seen in the years leading up to the pandemic.

Unemployment will slowly start to increase

Demand from all the additional people was strong enough to keep Australia’s unemployment rate hovering around 3.5 per cent all year, despite the influx of extra workers.

However, most economists expect an increasing number of people will find themselves without a job next year, as falling demand catches up with the labour market.

It’s something the RBA has been signalling for a while.

A queue of people stretches down York Street in South Melbourne, starting at the entrance to a Centrelink building.

More people may need government support if the unemployment rate rises as expected in 2024.(ABC News: Ron Ekkel)

“Now that of course is a very uncomfortable message for the government or for the central bank to deliver,” Phil O’Donaghoe, chief economist at Deutsche Bank Australia, said.

“Frankly, a short period of higher unemployment is better for the economy. Frankly, it is better for all people in the labour market than a prolonged period of unsustainable inflation.”

He is predicting a measured increase to unemployment.

“I think we’re going to be closer to a half a percentage point rise in the unemployment rate.”

But he warned too much more than that would be bad news.

“If, at the end of next year, we’re talking about 4.5, or closer to 5 per cent unemployment, then that would be a recession,” he said.

A man in a suit sits at a board table, with his chin on his hand, looking into the camera.

Deutsche Bank Australia chief economist Phil O’Donaghoe warns if the unemployment rate jumps too much, it could tip Australia into recession.(
ABC News: John Gunn

Dr Ellis will also be keeping a close eye on underemployment.

“You’ll see employers focus on the hours that people are working and so you’ll have fewer people, working longer hours, and you’ll see more underemployment as well as unemployment,” she explained.

“We actually think that underemployment margin is likely to be an important part of the economy’s response to slowing demand and tighter policy.”

Property prices will keep rising, but not as fast

It defied previous experience but even as the cost of borrowing money continued to rise this year — coupled with the soaring cost-of-living crunch — property prices kept going up.

“The primary thing I think that’s been driving that strength has been the very strong inward migration, we’ve seen that rapid population growth, the higher demand there has been for property,” explained Mr Bloxham.

But, he adds, as population growth slows in 2024 that will be less of a force driving demand.

“The other thing that’s going to happen to cool things down a bit is the effect of interest rates that haven’t fully flowed through yet, not least that some people are yet to roll off those very low two- and three-year fixed-rate mortgages and they’ll roll onto much higher rates,” he said.

“That will also slow down the housing market.”

Prices have already started to cool in some cities like Melbourne and Darwin as we race to the end of 2023.

Other cities, like Perth and Brisbane, continue to see significant price growth.

Streetscape and housing.

Property prices will keep increasing nationally, with smaller cities likely to see bigger rises than larger cities, where price hikes are slowing.(ABC News: Luke Bowden)

Dr Ellis expects, overall, prices are more likely to rise than fall nationally in 2024.

“It’s absolutely true that if someone had told you that interest rates would have increased by more than 4 percentage points, and that household incomes, on average, were declining in real terms, that you wouldn’t have expected house prices to be increasing the way they have this year,” she told ABC’s The Business.

“We are seeing a bit of a rolling over in house price growth, particularly in Sydney and Melbourne, so we do expect that while house prices will probably increase overall across Australia, it will be at a much slower pace next year than we saw this year.”

Global factors will continue to impact Australia’s economy

Russia’s war in Ukraine, conflict in Israel and Gaza, China’s reopening and our thawing trade relationship all had a role in Australia’s economy in 2023.

“The biggest impact from geopolitics to Australia is via the share market, and also via commodity prices, and of course the Australian dollar,” Ms Mousina said.

“I think the biggest impact of the relationship with China and Australia has actually been on the Australian dollar and that weakness in China, the concern about the Chinese economy that a lot of investors have, has applied through the depreciation in the Aussie dollar.”

War in Ukraine has raged for a second year and, while the human toll from that conflict keeps mounting, Australia has continued to be an overall economic beneficiary of the war.

Ukrainian soldiers walk by the graves of fellow soldiers decorated with flags and flowers.

Ukrainian soldiers walk by the graves of fellow soldiers, as the Russian invasion neared its first anniversary in February 2023.(AP: Vadim Ghirda)

“The simplest manifestation of the Ukraine conflict was, in fact, our commodity prices, things like natural gas exports, coal exports, the price of those exports, shot up dramatically,” Mr O’Donaghoe said.

“Australia, at a federal level, secured a budget surplus for the first time in 15 years and I think a big driver of that was that shock to commodity prices coming out of the Russia-Ukraine war.”

Mr O’Donaghoe added the initial spike in prices as a result of the war had ended, so next year’s federal budget would not be as positive.

“The government expects, of course, that in financial year 2023-24, we will return back to a deficit with the abatement of commodity prices,” he said.

The recently released MYEFO projects that deficit at just over a billion dollars, which is almost a rounding error for Treasury, and many economists expect another small surplus for the current financial year instead, before a return to moderate deficits after that.

Mr Bloxham will be keeping a close eye on politics outside Australia in 2024.

A man with dark hair, wearing a blue suit and tie, sits with his hands on a board table.

HSBC Australia chief economist Paul Bloxham predicts geopolitics will shape the global economy in 2024.(
ABC News: Glyn Jones

“We’ve got elections across the democratic world, and very important ones. We’ve got the US, India, Indonesia, Taiwan, the UK — and that’s just a shortlist,” he said.

“All of these and obviously, in particular, the US, is going to be a big focus for global markets.”

The RBA will enter a new era

It was hard to go a few days without any mention of the RBA or former governor Philip Lowe in news coverage throughout the year.

As households battled mortgage pain and the higher cost of living, he was the target of many people’s frustration as he neared the end of his seven-year term.

“I think a lot of that public criticism was very unfair,” Mr O’Donaghoe said.

“The inflation shock that hit Australia was not unique to Australia. It happened across our peer economies.”

“If you just look at the performance of the Australian economy, it is exceptionally strong,” he added.

Michelle Bullock sits at a table and smiles as Philip Lowe, sitting next to her, speaks into a microphone.

Michele Bullock took over from Philip Lowe, who came under pressure in his final months as Reserve Bank Governor.(ABC News: Andrew Kennedy)

Michele Bullock chaired her first meeting as RBA governor in October.

She will oversee changes to the way the central bank operates in 2024.

Her deputy is an outsider from the Bank of England, there’ll be two boards and fewer meetings to set the cash rate.

Dr Ellis, who has spent more than 30 years with the RBA, does not expect those changes will radically alter the bank’s course.

“The Reserve Bank will remain committed to keeping inflation low, returning inflation to target and avoiding too much of an increase in unemployment.”

“They’ll be very focused on defining and getting back to full employment over time.

“Their mandate won’t change in any material way that most Australians will see,” she told The Business.

The first meeting for 2024 on February 6 will come hot on the heels of the December quarter inflation data, which will likely play an influential role in the board’s first interest rate decision for the year.

“I’m expecting a rate hike at the February meeting, I think it’s just, it’s almost inevitable, frankly,” Mr O’Donaghoe said.

“After a break in January, the RBA has often changed interest rates in February,” Ms Mousina pointed out.

“It’s possible the RBA will have to come back and do just a little bit more, it’s possible that they will be able to remain on hold,” opined Mr Bloxham.

Only time will tell what 2024 has in store.

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