Bleak start to 2023, but Australia dodged a recession: Deloitte
Growth slowed and inflation risks remain, but the economy proved surprisingly resilient and this year leaves room for optimism.
Falling growth, rising rents and punishing cost-of-living pressures made 2023 a “sluggish year” but Australia avoided a recession and there is room for optimism for 2024, Deloitte Access Economics says in its annual review.
It said that compared with the outlook 12 months ago, parts of the economy have proved very resilient and the labour market was a “shining light” despite higher-than-expected migration.
“This time last year, the outlook for 2023 looked bleak,” Deloitte said. “Year-to inflation had just peaked in December 2022 at 7.8 per cent, the highest since 1990, and the RBA had lifted rates every month between May and December with few signs of respite in sight.”
“Fast forward to the end of 2023, and Australia has indeed had a sluggish year. Economic growth has slowed, falling from 3.7 per cent in 2022 to a forecast of less than 2.0 per cent for 2023. Cost of living pressures have been punishing on Australian households and consumer spending has faltered as a result.”
Deloitte said Australians had been forced to prioritise essential spending and the expense of discretionary purchases while record rent increases and the number of “at risk” mortgage holders meant many were doing it tough.
“Retailers have undoubtedly felt the squeeze this year. Real retail turnover declined for three consecutive quarters between December 2022 and June 2023 (the first time this has happened since 2008).”
“In any case, Australians have had to dig deep into their savings to sustain spending – the household saving ratio fell to just 1.1 per cent in the September quarter of 2023, compared to an average of 6.7 per cent over the decade prior to the pandemic.”
However, parts of the economy had proved remarkably resilient and that helped Australia dodge a recession.
One “key support” was a faster-than-expected rebound in overseas arrivals with record high net migration adding 518,000 people to the population. Deloitte said migration had been central to government policy and it had outlined significant reforms to the system.
“The labour market has been another shining light through 2023, remaining more resilient than most expectations,” it said.
“The unemployment rate remained impressively low – between 3.5 per cent and 3.7 per cent for much of the year, and only ticked up to 3.9 per cent in November.”
Another positive was a stronger global economy than many had feared led by the “economic resilience of the US”.
“All of these elements fed into another positive surprise in 2023: Australia’s first budget surplus in 15 years, and a welcome consequence of a number of tailwinds like favourable commodity prices, a strong labour market and that large rebound in migration.”
Deloitte said the prospects for 2024 might be slightly better for households and businesses as inflation fell further and real wage growth caught up.
However, there remained uncertainty about when inflation would fall back within the RBA’s target band and that meant there might be further interest rate rises.
Supply disruption – whether from disruption to shipping lanes in the Red Sea or the ongoing conflict in Ukraine or the Middle East – might still be a driver of inflation and China’s “disappointing” economic performance in 2023 could weigh on economic prospects.
But there were also significant opportunities for Australia.
“The transition to net zero can provide a wide range of export opportunities if we invest now, and the rise of generative AI could increasingly be an important means of lifting productivity.”
“Further policy reform is also on the cards, like the National Strategy to Achieve Gender Equality, which is vital to keep momentum for change going.”
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