Economy on a knife edge as cost of living pressures bite

The Australian economy is on a knife edge as consumer confidence hits near record lows but we should avoid recession, Deloitte says.

The Australian economy is on a knife edge with consumer confidence near its all-time lowest point, according to a leading business consultancy.

Releasing the September 2023 edition of the flagship Business Outlook report, Deloitte Access Economics Partner and report author David Rumbens issued a grim warning saying there was significant pain being felt across the economy with cost-of-living pressures biting.

“The retail sector knows about it – trend retail growth of just 1.3 per cent is the lowest trend growth recorded since 1982, just before Australia won the America’s Cup. Consumer confidence remains extremely fragile, near its all-time low point,” he said.

“Business failures have also been on the rise through 2023, centred on construction but also affecting accommodation and food services, manufacturing and retail trade.”

The report said against the backdrop of global uncertainty, Australia’s economy remains on a “knife edge” but believes country should be able to get through the year without dipping into an actual recession.

It said lifting business investment and productivity remains our biggest challenge. Especially in light of geopolitical uncertainties and the refashioning of the geopolitical architecture. Australia needs to rapidly incentivise the rebuilding of investment to drive productivity and prosperity.

Recession looms but Deloitte says Australia may be able to escape this year.

Mr Rumbens said a shaken-up Australian economy must not only deal with the cost-of-living crisis of today but also with helping Australia’s business sector look to 2024 as a year for growth.

“The business cycle will soon be past its low point and start turning up again. Real wages will start rising in late 2023, and strong population growth provides foundational support," he said.

The Reserve Bank has paused its aggressive interest rate rise strategy and in the current economic environment, Deloitte Access Economics would encourage that pause to continue, even in the face of some nervousness around oil prices and wages edging up.

However, it said it would not be surprised if the RBA, based on past form misreading supply side pressures, has one more rate hike left in it this year.

The report said Australia’s CPI growth is on a downward trend - going from a forecast headline rate of 4 per cent in 2023-24 to 2.6 per cent in 2027-28, thanks to the RBA squashing domestic demand, but mostly due to the unwinding of supply chain pressures which pushed prices up in the first place.

Australia has seen 12 quarters in a row of real wage declines and while it may be modest wage growth is now expected to exceed price growth on a quarterly basis going forward.

Data confirms both a retail and per capita recession in Australia.

Mr Rumbens said real wage growth will provide some welcome support for consumers, though it will be quite some time before consumers catch up on the purchasing power they have lost.

“Where Australia’s economy really needs to stir into action is in relation to business investment. Business investment looks to be on a slowing trend in these forecasts, growing by just 2.9 per cent in 2023-24 and 1.6 per cent in 2024-25,” he said.

“There is a risk that the current economic malaise sends businesses into a cost cutting mode. But it is vital that businesses do not cut costs at the expense of taking advantage of growth opportunities coming in 2024.

“Australia’s federal and state governments have the potential to make a difference in this economic transition – but not by doing nothing. Expected government investment growth of 7.5 per cent in 2023-24 will play a part – although only if that investment is well targeted.”

The report said a more important issue for governments was driving Australia’s national reform agenda – encouraging competition, sparking innovation, and building an elite national skills base.

For Australia’s economy overall, AI provides an enormous opportunity to lift productivity growth but it all depends on the size of the potential change and how quickly it might come through.

The five industries facing a ‘short fuse, big bang’ scenario comprise finance, ICT and media, professional services, education and wholesale trade.

“In the short term, Australia’s best performing sectors in 2023-24 in terms of output growth may be a rebounding transport sector (4.3 per cent growth) and health care and social assistance (3.4 per cent),” Mr Rumbens said.