Upturn or Uncertainty: Understanding Australia’s Economy in 2024

As we approach the end of 2024, the latest updates about Australia’s economy have not been very encouraging. The crucial question remains: should we prepare for difficult times ahead, or is there a chance for improvement in the economic outlook?

Jobs Galore – For the Time Being

Leading up to the election, the Albanese government is likely to ramp up job creation efforts, aiming for 1 million jobs since taking office, unless there are unforeseen declines in the coming months. This is currently one of the few bright spots in the economy.

Critics often point out that the majority of the new jobs have come from the “non-market sector,” largely funded by public spending.

In its recent mid-year economic outlook, the government updated its predictions, acknowledging the strong demand for labor. Employment is expected to grow by 1.75% this fiscal year, an increase from the earlier estimate of 0.75% made in May.

So far in 2024, more than 330,000 jobs have been created, with only a slight decline recorded in March. However, there may be adjustments in employment figures this month, especially considering last December saw a significant decrease of 106,600 full-time jobs.

The underemployment rate has dropped to 6.1%, marking a 19-month low, while the overall unemployment rate stands at 3.9%.

The Overall Economy is Growing

As the Reserve Bank of Australia (RBA) tackled the highest inflation rates in 30 years with aggressive interest rate hikes, many economists speculated how Australia would avoid a recession.

A growing population has contributed to this resilience, balancing out the demands on housing. Furthermore, increased government spending has filled gaps in the economy. The budget from May projected public demand, which includes spending from states and local governments, to grow by 1.5% this fiscal year. However, revisions in the mid-year economic outlook have raised this expectation to 3.75%.

If these additional expenditures were excluded, the economic situation would likely be much bleaker, resulting in potential bankruptcies and distress for many households.

While some companies, like CBA and Telstra, have downsized their workforces, and certain sectors have faced closures, the overall number of corporate failures has not been as catastrophic given the high-interest rates sustained for over a year.

Tax Cuts Just in Time

At the beginning of 2024, there were increasing calls for the government to reconsider the stage-three tax cuts to better support lower-income earners. Some feared that increasing consumption would complicate the RBA's efforts to control inflation, while others saw it as a broken promise.

Ultimately, any inflationary impact appears minimal, as the central bank had already accounted for over $20 billion in increased demand resulting from these cuts.

Interestingly, households have shown more caution than expected in their spending. The tax cuts have allowed them to slightly decrease the percentage of their disposable income going toward mortgage repayments in the September quarter.

The RBA noted that while debt payments are high, almost all borrowers are expected to manage their debts, even with continued high inflation and interest rates.

Continuous Growth in Real Wages and Wealth

Although Australia's GDP continues to grow, productivity per person has dropped for seven consecutive quarters. However, wage growth has consistently outstripped consumer price inflation for the past year.

The ongoing tightness in the labor market suggests that real-wage increases may continue for a while. The mid-year economic outlook lowered the budget's wage price index forecast to 3% for next June and 3.25% for the year after, but wages are still expected to slightly exceed the consumer price index predictions.

The RBA is also optimistic that wage growth will stay ahead of inflation at least until June, anticipating a rebound in consumer price inflation starting in July.

It’s hard to imagine that political parties like Labor and the Coalition would not promote continued rebates that help to reduce inflation rates ahead of the elections.

On a positive note, household wealth has seen consistent growth, increasing for eight quarters in a row, resulting in total household assets of approximately $16.9 trillion by September 30, marking a nearly 10% increase compared to the previous year.

Mixed Signals Ahead

However, one area of concern is private investment, which has been underwhelming. Government spending cannot sustain economic growth indefinitely, especially with states like Victoria beginning to cut back.

Initially, private demand was predicted to grow by 1.75% this fiscal year, but recent forecasts have reduced that estimate to just 1% for the year ahead.

Yet, some positive indicators are surfacing, especially with potential rate cuts from the RBA becoming more likely. Current predictions suggest a 75% chance of a rate cut in February and possibly another cut by July.

A recent survey from Westpac and the Australian Chamber of Commerce found that manufacturers are currently balanced between growth and decline, with their outlook being the best since September 2022.

Still, uncertainties remain. Extreme weather events may worsen, political developments such as a potential Trump administration could disrupt global markets, and ongoing issues related to China’s economy may impact Australian exports.

Domestically, the reliability of aging coal-fired power plants during extreme weather could pose additional risks. A declining Australian dollar may also delay anticipated interest rate cuts.

In summary, while challenges lie ahead, the economy appears to be on a gentle recovery.

economy, jobs, inflation, growth, wages