by Nicki Hutley
Australia’s economic growth has slowed and unemployment has begun to rise. But what happens from here and what does it mean for interest rates and household budgets? Economist Nicki Hutley provides an overview of what to expect from the economy in the year ahead, and what it might mean for you.
There is a lot going on in the economy at the moment, some of which will be good for households, and some of which will continue to present challenges over 2024. Here’s an overview of what to expect in the year ahead.
The Australian economy slowed over the course of 2023, and it was only a record surge in population numbers that kept growth on an upwards path. But those big migration numbers won’t keep going in 2024, as the government has reduced its targets.
So 2024 will see the pace of growth slow a little further, as the impact of 13 interest rate rises continues to take its toll on household budgets, along with the effects of high inflation.
However, no one is expecting a recession in 2024. The majority of economic commentators, as well as the Reserve Bank of Australia (RBA), are forecasting a “soft landing” for the economy. This means that most forecasters believe that, over 2024:
- Inflation will continue to come back to more normal levels, getting close to the top of the RBA target of 2% to 3% (it was 3.8% in January this year)
- The economy will keep growing, but at a very lukewarm pace (around 1.5%)
- Unemployment will rise further – it went from 3.6% in January 2023 to 4.1% in January 2024, and is likely to reach 4.5% before the end of this year, and
- The rate of business failures will also rise further, but from relatively low levels.
The good news is that, if these forecasts come true, we can expect interest rates to hold steady over the next six months or so before the RBA begins to cut rates again, which will ease mortgage pressures.
In fact, if all goes well, by the end of this year, we will likely see lower inflation, lower mortgage rates, rising real wages, and house prices a little bit higher. Add to that the Stage 3 tax cuts, which will help a lot of families. If you have a job, odds are that you’ll be better off by the end of the year than today.
But remember, we are expecting unemployment to rise a little further, so it will be tough for some. And most prices won’t go backwards, they’ll just stop rising so quickly – so household budgets will still be stretched for a while. This is especially true when it comes to housing affordability – it’s only going to get more difficult for first home buyers and renters.
There are some other risks to the outlook for the year ahead, including:
- Inflations stays higher for longer, and so do interest rates. A lot hangs on how quickly inflation falls this year. If consumers become very confident and start to spend more – by eating into their savings – then the RBA won’t be in a hurry to cut interest rates, and there’s even a small chance they might have to lift them even further.
- The economy slows more than expected and a mild recession occurs. With consumer spending already very weak and our biggest trading partner, China, facing its own economic woes, this is not too hard to imagine.
- Climate change events disrupt economic activity. We’ve had no shortage of fire and flood in Australia over the past four years and these extreme events add to price rises and slow economic activity. And it’s not just in Australia. Global events are also disruptive to trade and economic growth.
- Technology change further has unexpected impacts. Artificial intelligence is everywhere and having all sorts of unexpected consequences. Many business leaders expect technology will replace a small part of their workforce in 2024.
To sum up, let’s keep our fingers crossed that the soft landing most expect arrives in 2024. But a sensible strategy is to prepare for rainy days. Check your budget and make sure you have some “just in case” savings, if you can.