It looks like we are near peak rates and inflation, but rates will be higher for longer and the cost of doing business will continue to increase. This will obviously lead to economic growth being more subdued. Evidence of this is already appearing as primary producers are expecting to outlay $75.9bn on production cost for the 2023/24 season, which is only second to last year’s $76.05bn. Household spending on discretionary items is starting to fall as the household savings ratio has fallen to levels not seen since 2008. This has led some economist to believe that continued price increase will now start to hit harder and result in less consumption and decreased demand for goods and services.
Ever increasing geopolitical risks such as the slowdown in the Chinese economy due to debt issues in their property market, war and conflicts between Russia and Ukraine and now Israel and Palestine continue to cast uncertainty over the global economy and keep pressure on energy and fuel prices. With the current Israel and Palestine conflict having the real potential to expand as surrounding oil producing nations may get involved.
The WTO has lowered their 2023 trade forecast and left 2024 at 3.3% and have concern that world trade may be starting to fragment due to COVID disruptions, geopolitical conflicts, and the increasing number of more localised trading packs and blocs being signed, as countries look to reduce reliance on China for goods and critical minerals. This will add costs to supply chains and production of these goods and critical minerals. The USA’s Inflationary Reductions Act is an example of this.
For me the canary in the coal mine is still the unemployment rate. The labour market is still tight with low unemployment of 3.7% when compared to the long-term average of circa 5%. The RBA has signalled they want the jobs rate as low as possible while returning inflation back to its mandated level of between 2-3% and has forecast this to occur in 2025. Any significant increase in the unemployment rate from here will signal a definite slowdown in the Australian economy is occurring and vice versa if unemployment continues to remain low. The RBA has signalled they are comfortable with where headline inflation is but are concerned about sticky services inflation driven by higher inputs and labour costs (i.e. fuel, diesel, fertiliser, power, wages, labour shortages …
