Economists’ Predictions for 2024

The end of the financial year is the ‘New Years’ of finance.

It’s a chance to reset and reflect on how we’ll tackle the year ahead. Like New Years, it is marked with lofty goal setting and personal commitments to do better. You might even crack out the champagne to celebrate when the mammoth accounting tasks are done.

Unlike New Years, however, the outlook beyond EOFY isn’t rose tinted. We don’t have the vanilla-scented newness of an exciting year ahead. Instead, we’re getting some ominous and honest appraisals. Darkness shrouds our finances. Challenges are inevitable. The economy is in its ‘Dark Knight Rises’ era and it has all the drama of Nolan’s best film.

The Conversation’s annual economist survey has us wary of recession and interest rate rises that won’t quit. So what’s on the cards for 2024?

Interest rates are the elephant in the room.

The Reserve Bank has left the Australian public deeply divided and confused. Betting on whether we’d get a rate rise was such a game of chance I’m surprised SportsBet didn’t get in on it.

But Lowe’s rapid belt-tightening was not unprecedented. In fact, there is a logic beneath the tricky decisions. The economists’ antennae are picking it up, and they say we’re in store for a substantially higher cash rate.

Interest rates are the main policy tool in our inflation-fighting arsenal. It’s a chainsaw, scalpel, and pressure cleaner all in one – designed to fix any of the economy’s ailments. The problem is that monetary policy is not a precise science. It is tough to know when your changes are actually taking effect and if you have done enough to fight the inertia of public finances.

This is why aggressive tightening cycles are often needed. Lowe needed real chutzpah (my new favourite word) to shock people into restraint and keep inflation on a downward trajectory. That’s just the tip of the iceberg. Rising rates are needed to lift unemployment (which takes serious moolah out of businesses’ pockets), cement people’s expectations, and keep investment low. The high rate figure is as beguiling as Lady Gaga’s meat dress. We’ll never understand the reasons behind it, but we can trust there’s method to the madness.

Twelve interest rate hikes have lifted the cash rate from 0.1% to 4.1% in just over a year.

Rates are now firmly in restrictive territory. This means they are slowing the growth of the money supply and withdrawing money from the economy. This takes the slack out of the economy. Less money floating around causes higher interest rates as money becomes more exclusive. It also lowers price expectations and depresses GDP. This closes the output gap and brings the economy closer to its ‘natural state.’

An aside, the economy will always fight hard to be organic. The natural state is a stable one.

Many of the rate rises we’ve already experienced have been focused on getting rid of the surplus covid stimulus. Only after this huge wad of stimulus money has been wound back can we start tackling the underlying supply problem.That’s why The Conversation’s panel predicts a cash rate of 4.5% by the end of this year, followed by a decline to 4.3% in mid 2024, and to 3.9% by the end of 2024. Asked on what they expect the peak to be, they settled on 4.7% in November. This would add another 60 basis points to new mortgages and add $200 a month in repayments on a $600,000 loan.

It’s a more aggressive tightening than any of the banks are willing to say out loud. I think it is a case of wishful thinking. If they don’t say it then Lowe won’t be tempted.

But economists are much more realistic. They will be looking past their neural scar tissue to remember Volker’s rapid tightening in the 1980s to bring down stubbornly high US inflation. Keating might also come to mind with the recession we “had to have.” It’s now Lowe’s turn.

On inflation, we are in store for a slow return to normal.

A painfully slow one. The panel expects inflation to drop to 5.2% by the end of the year, then to 3.9% by mid-2024, and to 2.9% in 2025. Although steep, the panel’s predictions are much slower than the Reserve Bank’s. They predict inflation to be 3.6% by mid-2024.

Ever the optimists.

Barrenjoey’s Chief Economist Jo Masters noted that inflation is increasingly coming from domestic sources. The price of rents, services, and products with high energy needs (have you seen the latest increase to your bill?) are all being pushed up by local factors. Masters expects them to be persistent.

Moody’s Harry Murphy Cruise noted that the RBA was unwilling to let inflation take its course, doing anything to “knock the wind out” of an economy already on its knees.

Obviously the RBA doesn’t want to be the reason we can’t have nice things. But the fight against inflation needs to be swift before it becomes properly entrenched.

Wage forecasts are good news for workers.

On average, the panel expects real wages to increase by 0.1%.

While prices will grow by 3.9% in 2024, nominal wages will grow by 4%. Okay it might not be a groundbreaking figure, but compared to the doomsday forecasts of wages falling back to 2008 levels, it is remarkable.

It is happy days for your pay docket.

The other elephant in the room, recession, is waving its tusks about.

And the Reserve Bank is proving to be a contentious zookeeper.

The recessionary elephant looks very unhappy in its enclosure. New Zealand is already in recession and the panel assigns a 59% chance that the United Kingdom will be in recession by the end of this year. The panel predicts economic growth of just 1.2% in Australia, the lowest non-recessionary result in over 3 decades. Furthermore, they estimate the chance of a recession in Australia at 38%.

Those odds are not as bad as America’s or the United Kingdom’s. But it presents a very real risk to all parts of the Australian economy. The Reserve Bank’s own analysis found that 15% of households on a variable mortgage experience negative cash flow. That is roughly one million people. Those generous savings buffers many Aussies accumulated during lockdown are being drained. And with unemployment expected to rise, we will likely see a fresh wave of mortgage prisoners.

Emancipation won’t be on the cards until at least 2025, when rates start to ease just a little.

KPMG’s Chief Economist Brendan Rynne believes we will certainly have a “shallow, extended recession” where growth is depressed by weak investment in housing and business expansion. Currently the housing market is defying those expectations. But is a return to contraction inevitable?

I think it depends on how sellers respond when rates hit their ceiling.

Through June, the flow of new listings in capital cities was 10% below the five year average. Inventory levels are over 25% lower than average. There is a real tightening of supply, especially for high-end properties. As vendors pull out of the market because they’re scared they won’t get the right price, they lower supply and inadvertently lift prices. Properties are going for more than they’re really worth. It’s not too difficult to see this trend continue.

High population growth will keep the property market buoyed and counter some of the recessionary forces that Rynne mentioned before.

The property price rollercoaster continues its climb.

Cashed up Australians coming out of the woodwork to purchase houses and enduringly low supply has kept the upward pressure on house prices. In 2022, more than 25% of homes sold in Queensland, Victoria, and NSW were bought without a mortgage.

This amounts to a staggering $122.5 billion worth of property paid for in cash.

It also inures them from rate rises. Coupled with the strength of the luxury market and renewed migration, the panel expects prices to grow in both Melbourne and Sydney. Only four out of 27 members predict a decline.

Jo Masters notes that sellers are withdrawing supply while those with higher incomes are taking up a larger share of property purchases. This touches on a really interesting point. As interest rates rise, people need higher incomes to pass their bank’s serviceability hurdle for loan approval. This means that only borrowers with lower debt to income ratios get approved for finance. When rates were near-zero, anyone could get a loan. The current cash rate of 4.1% is prohibitive for lower income borrowers.

As such, the market is full of people with higher incomes who can afford to stretch on a loan. This is where a lot of the price growth is coming from.

The lowdown on unemployment.

A crunchy session with rising rates and rising costs have made businesses re-evaluate some decisions. Do I need another plate of cake? Do I need to get that new Macbook? Do I need a 20 person team?

The panel expects unemployment to lift to 4.3% by mid 2024 and increase to 4.6% by mid-2025. Cue the violins. However, there is a little silver lining. Both the Treasury and the Reserve Bank believe that Australia won’t surrender the big employment gains of the pandemic.

University of Tasmania economist Mala Raghavan argues that we’ll feel the biggest shifts in underemployment. People will probably work fewer hours than they would like to, thanks to the return of foreign labour and international students.

Markets will be subdued and the budget deficit will return.

All of this talk of recession and declining spending has the markets a little sour. The panel predicts the share market to grow a modest 3% in the year to June 2024. With savings rates at a comfortable 5% and over on many accounts, that return doesn’t sound all too appealing.

Bringing it to government things, the panel predicts that we’ll have a tiny budget deficit of $9.4 billion in 2023-24. Given that our budget deficit for 2020-21 was $134 billion, the estimated figure is a drop in the ocean. it is just 0.4% of our GDP.

This puts us in a good position.

Any budgetary beard-stroker will tell you that a well stocked government coffers is good news. It helps keep the non-inflationary size of the public purse in check. They can go on spending on the things we like, such as Medicare and new transport links, while we get on with our daily biz.

To summarise.

While we don’t have the rose tinted glasses of New Years, this end of financial year isn’t all bad news.

Australia is once again the lucky country, protected from the financial headwinds that are battering the UK and the US. Even just across the ditch, New Zealand has it worse. Silver linings are hard to come by so the fact we aren’t guaranteed a recession is a glimmer of hope.

That is something to celebrate!

But we should be wary. While recession is not a sure bet, a period of sustained low growth could be painful for Australian businesses. Everyone in finance needs to be prepared for a more competitive industry, with different rules to play by. Use this EOFY to rewrite the book for your business. And crack out the champagne, before inflation gets to BWS and Liquorland.

About the author

Ulrika Lobo

Ulrika Lobo is the lending specialist at Sparrow Loans and has over ten years of experience in the commercial business loan space. Ulrika co-founded Sparrow Loans to provide Australian SMEs with a faster and easier way to access finance. Ulrika is responsible for managing the lending process from underwriting to execution and settlement and post-settlement support.