Bendigo and Adelaide Bank: December Economic Update

While the domestic economy has ended the year with record low unemployment, and resilient economic growth, 2023 will bring more rate hikes and higher unemployment according to Bendigo and Adelaide Bank’s Chief Economist, David Robertson.

Releasing his final economic report card for the year, Mr Robertson says the full force of eight consecutive RBA hikes will start weighing on the economy early next year – with more hikes on the way.

Latest economic figures

“The domestic economy has ended 2022 with low unemployment and resilient economic growth, with the latest GDP data showing economic growth of 5.9 percent over the last year to September; a stellar recovery from the Delta lockdowns just over a year ago,” Mr Robertson said.

However, we’re likely to see this resilience tested further ahead of the economy feeling the force of the RBA rate hikes in 2023, with one very likely in February.

“GDP growth for the quarter was 0.6 percent, down from 0.9 percent in the June quarter, and from here the accumulation of three percent of rate hikes since May will hit demand and household spending, especially early in the new year,” Mr Robertson said.

“As a result, the annual growth rate will quickly decelerate to between one and two percent.”

Interest rates

“The RBA have utilised monetary policy with force, and next year, we expect to see one to two more hikes likely to be deployed,” Mr Robertson said.

“Assuming the RBA stop hiking the cash rate in the mid to low threes, we are still cautiously optimistic that the RBA will see their desired soft landing come to fruition.

“This will be in stark contrast to many of the larger economies around the world, who we still expect to fall into recession. Many other central banks are taking official rates to around 5 %, making a soft landing much less likely.

Mr Robertson said the key variables for our economy in 2023 will be:

• How quickly inflation starts to fall
• How ‘interest rate sensitive’ various parts of the economy prove to be, and
• Supply factors and related policy settings, for example China’s COVID-zero policy

Employment

“Fortunately, we’ll enter this slowdown next year with labour markets in excellent shape, with our unemployment rate at a low 3.4 percent - its lowest level in 50 years,” Mr Robertson said.

“Other indicators such as underemployment and hours worked all point to very strong but tight labour markets, so the economy is better positioned to deal with the slowdown than at any point since the GFC.

“However, with another RBA rate hike likely in February, taking the cash rate to 3.35 percent, this will start to take momentum out of the jobs market, and likely push the unemployment rate back above 4 percent by the end of 2023.

“Rate hikes impact the economy with a lag, but the inflated cost of all goods and services is already hitting household budgets, and high inflation means real incomes are falling and asset values being eroded,” Mr Robertson said.

“The solution to achieving sustainable, real wages growth lies in reducing inflation back to its target, which should make steady progress next year, but also demands lifting labour productivity - something that has been elusive for decades.

 “This is why the Productivity Commission’s recommendations to be released in February will be vital to guide government policy and further structural reform. The wage price index is back above 3 percent, its highest level in a decade, and in 2023 it should rise further to around 3 percent but getting inflation back down to below this level will take time.”

The Australian Dollar

“The Australian dollar is a good proxy for risk appetite in the Asia Pacific, so its recovery from just below 62 cents  to 68 ½ US cents is encouraging locally,” Mr Robertson said.

“While some of this move relates to the US dollar losing some of its recent strength, policy settings in China were also a contributing factor.

“In 2023, while we still expect a mild appreciation for the Aussie, volatility across the markets will remain elevated, and so Australia staying out of recession may more reliably translate to further gains on a trade weighted basis than against the volatile US Dollar,” Mr Robertson said.

Property values

“Last, but certainly not least,  property values remain on the defensive, with the national peak to trough fall now 7 percent,” Mr Robertson said

“One of the consistent aspects of 2022 has been just how uneven these price movements have been, by state, region, and attribute.

“In 2023 we’ll see further falls, but still with clear examples of outperformance and resilience, Mr Robertson concluded.