The treasurer, Jim Chalmers, will release the Albanese government’s mid-year economic and fiscal outlook next week.
Here’s how the economy has fared compared with forecasts made at the start of 2023 and some of the biggest surprises over the past year.
How it started
Chalmers told ABC’s Insiders in February it was “a very difficult time for Australians dealing with these cost of living pressures which are coming at us from around the world”.
He touted three “Rs”: “relief where we can, [budget] repair and restraint [by not spending unexpected revenues].” Australia would avoid a fourth “R” – recession.
In its February monetary policy statement, the Reserve Bank also assumed the economy would keep growing, albeit more slowly. GDP expanded 2.7% in the final three months of 2022 and the RBA forecast a 1.6% pace by the end of 2023.
Annual consumer price inflation, peaking at 7.8% in the December quarter, would sink to 4.8%, the RBA tipped. Its key interest rate, ending last year at 3.1%, would rise to “around 4%” by mid-2023. The jobless rate, seeing out 2022 at near half-century lows of 3.5%, would nudge 3.8% by the end of this year. Wages would advance 4.2%.
Private economists mostly weren’t as confident. The CBA’s head of Australian economics, Gareth Aird, expected just one more cash rate rise, to 3.35%. We would enjoy two rate cuts in 2023, lowering the cash rate to 2.85%. Westpac estimated a 3.6% rate by now.
Growth would stagnate in the second half of 2023, Westpac forecast. For CBA, annual GDP growth would be at 1.1% by the December quarter, with inflation sinking to 3.4% or close to the RBA’s 2%-3% target range. The jobless rate would end 2023 at 4.25%.
How’s it going?
December quarter GDP figures won’t land until 6 March but September data out this week showed annual growth of 2.1%. On a quarter-by-quarter basis, the economy expanded 0.2% but given a swelling population, per-capita GDP shrank 0.5%.
The RBA did lift its cash rate to 4.1% by mid year. It paused for four months before its board – led by the new governor, Michele Bullock – hiked one more time to 4.35%.
Inflation has turned out to be more tenacious than expected. Annual CPI eased to 5.4% by the September quarter and the RBA forecasts it will end 2023 at 4.5%. With CPI not tipped to shrink to 3% until the end of 2025 (six months later than the RBA tipped in February), economists say the cash rate might yet rise further.
“At the beginning of 2023, many economists talked about the possibility of a soft landing but most people thought the probability was pretty small,” the chief economist of Asia Pacific at S&P Global Ratings, Louis Kuijs, said. “Most people feel that it’s still definitely not in the bag but the probability has increased.”
“We really are in the midst of the soft landing as we speak,” Judo Bank’s chief economist, Warren Hogan, said.
More comforting has been the strength of the labour market. As of October, the jobless rate had crept higher, to 3.7%, with new jobs so far keeping up with population. Wage increases, though, will come in at 4% for the year, the RBA said.
“The big two things – unemployment and inflation – have turned out almost exactly as the RBA anticipated at the beginning of the year,” says Luci Ellis, who started the year as the RBA’s chief economist and ended it as Westpac’s. “I’m happy to take credit for that one.”
2023’s biggest surprises
Aird says Australia’s rising headcount caught most off-guard: “Population growth has massively exceeded everyone’s estimates, including the government’s.”
The 2022 budget forecast population growth of 1.4% in both 2022-23 and 2023-24, rates revised higher to 2% and 1.7%, respectively, by last May’s budget. In the year to March, it swelled by more than 560,000 people, or 2.3%, the ABS said.
That spurt in turn helped trigger higher inflation, through rents and other demand. Property prices rose even as the RBA kept hiking its cash rate, a rare combination.
“Essentially house prices are somewhere between 10% and 15% higher than where we probably thought they would be by now, this time last year,” Hogan said, adding it’s been a case of a “fear of missing out”, or Fomo, on steroids.
National housing prices fell 7.5% from April 2022 to January 2023 before rebounding more than 8% by November, according to CoreLogic.
Internationally, the US economy will likely post 2.1% growth in 2023 or about 50% more than the International Monetary Fund was forecasting in January.
China, too, has been a surprise but in ways economists are still trying to comprehend. Its GDP growth outlook has been trimmed to 5% for this year and 4.2% next by the IMF, from 5.2% and 4.5%, respectively.
China’s property sector – which consumes 55% of the iron ore Australia ships to the country – is shrinking at a 20% annual rate. And yet, the iron ore price has not only held up, it’s been on the increase, an outcome NAB economist Gerard Burg called “completely baffling”.
Myefo awaits
The May budget forecast iron ore prices to retreat from $US117/tonne ($A179/t) to $US60/t, but instead they are hovering above $US130/t. Coking and thermal coal are also much higher than Treasury predicted, boosting royalties and corporate tax.
Chalmers said this week Myefo won’t forecast a surplus for the current fiscal year. Then again, his October 2022 budget pencilled in a $44bn deficit for 2023-24, a forecast revised down to $13.9bn by May.
With jobs more plentiful than expected but also inflation remaining sticky, billions of dollars of extra tax revenue have been funnelled Chalmers’ way via bracket creep.
Ellis says the government will likely run another surplus this fiscal year once final numbers land. “Income and other taxes as a share of gross income in Australia are as high as [they’ve] ever been,” she said.
“Fiscal policy is doing more than monetary policy” to chill inflation, Ellis said. Something that Chalmers may not be highlighting when he releases Myefo.
