You don’t have to be an Einstein to figure out that 2023 is going to be a tough year. Australian consumers have already worked this out, with sentiment plunging to record lows.
The bellwether of the Australian economy is housing. Prices are tumbling, with annual growth now close to zero.
Iron ore, another strong indicator, rallied on news that China is easing COVID restrictions but prices are still trending lower.
The Chinese economy faces a host of problems. A crumbling real estate sector, over-burdened with debt. Threat of a widespread pandemic as COVID restrictions are eased. Private sector growth collapsing as the hardline government reverts to a centrally planned economy. And a major trading partner, the US, intent on restricting China’s access to critical technology.
Rate hikes and inflation
The RBA hiked interest rates by another 25 basis points this week, lifting the cash rate to 3.1%. But the central bank is way behind the curve, with the real cash rate still deeply negative.
Monthly CPI eased to an annual rate of 6.9% in October, down from 7.3% in September, reflecting an easing of goods inflation.
But a rising Wages Index reflects underlying inflationary pressures that may force the RBA to contain with further rate hikes.
The lag from previous rate hikes is also likely to slow consumer spending. Borrowers on fixed rate mortgages face a steep rise in repayments when their existing fixed rate term expires and they are forced to rollover at far higher fixed or variable rates. A jump of at least 2.50% p.a. means a hike of more than A$1,000 per month in interest payments on a $500K mortgage.
GDP Growth
The largest contributor to GDP growth, consumption, is expected to contract.
Real GDP growth is already slowing, with growth falling to 0.6% in the third quarter — a 2.4% annualized rate. Contraction of consumption is likely to take real GDP growth negative.
Plunging business investment also warns of low real growth in the years ahead.
Record low unemployment seems to be the only positive.
But that is likely to drive wage rates and inflation higher, forcing the RBA into further rate hikes.
Conclusion
We may hope for a resurgence of the Chinese economy to boost exports and head off an Australian recession. But hope is not a strategy and China is unlikely to do us any favors.
We expect rising interest rates to cause a sharp contraction in the housing market, tipping Australia’s economy into a recession in 2023.
Acknowledgements
Charts were sourced from the RBA and ABS.
Ross Gittins: Hard times are coming for the Australian economy
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.
Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.
