The Year Ahead - What we already know

Some years ago, when the Aussie Dollar was trading at $0.88, a number of leading economists were asked for their twelve-month forecasts. One confidently said our dollar would reach parity with the US dollar within a year.

Instead, the AUD finished the year 34 per cent down at $0.58.

Making economic predictions is fraught with peril. Economics is more art than science, and a modern economy has many moving parts that don’t always behave rationally. Still, looking ahead in 2023, there are some things we can reasonably expect.

Interest rates will keep rising – for now

Australia started 2022 with the official cash rate seemingly stuck at the record low of 0.1 per cent where it had been since November 2020. Then eight rises in as many months lifted the rate to 3.1 per cent, the highest in nearly a decade.

Where to from here? According to the Reserve Bank, there are more rate rises to come. But that statement comes with a disclaimer; in the Bank’s view, inflation should peak around now, and the impact of recent rate rises on borrowers is yet to be fully felt. It seems likely that rather than hiking the rates each month there could be a pause while the Bank waits for new economic data.

Property prices may have some way to fall

Melbourne and Sydney, traditionally Australia’s strongest property markets, were the country’s worst in 2022. Melbourne prices fell 8.1 per cent in 2022. Sydney, which saw massive gains in 2020 and 2021, dropped 12.1 per cent last year.

On average, capital city prices eased 5.3 per cent.

And the indicators suggest there could be more pressure on prices in coming months. Transaction volumes have fallen, interest rates and inflation are still rising, and there’s still some risk of a recession. Many economists are reported as forecasting total price falls from the peak of between 15 per cent and 20 per cent.

Working from home is here to stay

Some employers are encouraging their remote workers to ditch the dressing gown, and dust off the business suit. Others have embraced the change, taking the opportunity to restructure or downsize their workplaces.

The work from home transition may have been forced upon us by Covid, but increasingly, it appears to have created a permanent shift in the work environment.

Globally, 16 per cent of companies are now fully remote, double the level of 2017. And a high proportion of advertised vacancies for professionals offer working from home, or a hybrid home/office arrangement, to attract staff.

Fewer people heading to the office each day puts pressure on central business districts – everything from utilisation of commercial property to small businesses that rely on foot traffic. The full impact of that decline in office worker numbers is yet to be calculated.

Covid isn’t going away just yet

Just when you thought it was safe to leave the house, a new outbreak or new variant of Covid emerges. It seems unlikely we’ll return to the days of lockdowns, but we won’t be able to avoid the inevitable strain on health services and impact of employee absences.

The immediate risk to Australia’s economy is the impact of China’s removal of Covid restrictions, which will inevitably result in a wave of infections. China is Australia’s largest trading partner by some margin, and supply chain disruptions could bring some local industries to a halt.

Staff shortages will continue

Record low unemployment is usually regarded as a good thing. But talk to many employers, and you’ll find they just can’t attract staff. Nearly every industry – from hospitality to healthcare – is struggling. Combine those staff shortages with higher levels of absenteeism due to illness, and you’ll understand why many retail businesses have either closed, or reduced their trading hours.

In some regions, attracting staff has become virtually impossible due to a severe shortage of housing, coupled with skyrocketing rents.

Some employers have resorted to cash sign-up bonuses or generous relocation incentives in an attempt to fill vacant positions. Sometimes, that isn’t even enough.

The rental crisis won’t be fixed easily

There’s a critical rental housing shortage across Australia. Less than three years ago, the average vacancy rate was 2.9 per cent. Now, it’s 1.0 per cent – and falling. Of the capital cities, the lowest vacancy rates are in Perth, Brisbane and Hobart.

In-demand regions like the Sunshine Coast and the NSW north coast are also reporting very low availability of rental accommodation.

That tight supply has resulted in sharp increases in rent, with reports of 50 per cent rent hikes in some areas.

While the replacement of long-term rentals with Airbnb tenancies has been blamed for the shortage, there are many contributing factors, including tax treatment of rental properties, generous CGT concessions, and until recently, availability of debt at record low rates.

It’s likely to be some time before solutions are found.

And finally, the Australian share market

Each year, one of our leading publications asks brokers where they think the market will be at year’s end. Every year, some are optimists, and some are deeply pessimistic. The truth is nobody can forecast share markets with any degree of accuracy.

After all, nobody predicted that the value of Australian shares would fall more than 30 per cent in just a few weeks early in 2020.

This article contains factual information only and is not intended to be general or personal financial advice, and is for educational purposes only.