Increased stress for the household sector and a major downward revision to the dwelling construction cycle have lowered our growth forecasts in 2022 from 4.5% to 4.0% and 2.5% to 2.0% in 2023. Still, 2022 is a strong year for growth, as the economy reopens and households take advantage of their high savings rates and solid balance sheets.
Following the release of the March quarter national accounts for Australia we have slightly lowered our growth forecasts for 2022 and 2023.
The 2022 growth rate is lowered from 4.5% to 4.0%; 2023 is reduced from 2.5% to 2.0%; while 2024 is lifted from 2.0% to 2.5%.
In the March quarter national accounts, we saw strong consumer spending growth of 1.5% which was largely funded by a fall in the savings rate from 13.4% to 11.4% releasing $6bn to finance the $8.7bn in additional consumer spending.
At 11.4% currently, the household savings rate remains well above the 6% “equilibrium” rate near where we expect the rate to settle by year’s end.
That fall in the savings rate is likely to release a further $15-20bn to support household spending through the year.
Overall, we expect household spending to increase by a solid 6% over the course of 2022 highlighted by 2.6% and 1.1% growth in the June and September quarters to supplement the (disrupted) 1.5% increase in the March quarter.
That is down from a forecast 6.2%. We are now expecting a more abrupt slowing in the December quarter (revised down from 0.9% to 0.7%) as the reopening effect fades; the boost from a lower savings rate ease; and house prices continue to fall.
Consumer Sentiment is likely to remain weak in the face of higher costs and rising interest rates. However, confidence in job security is likely to remain high and household balance sheets have been strengthened by the accumulation of around $265 billion in excess savings over the last two years.
Perceived job security and the balance sheet buffer will allow households to maintain spending plans at a higher level than would have been the case in the current environment of rising living costs and increases in interest rates.
As we saw in the March quarter there is considerable “opening up” momentum in the household sector despite the material disruptions from Omicron and the floods.
The June and September quarters are likely to continue to see that boost momentum lifting further in the absence of those disruptions in the March quarter.
There is still scope for considerable “catch up” – discretionary services consumption is still 12% below pre Covid levels.
The major states – NSW and Victoria – which were most impacted by lock downs will be in catch up. While nationally overall spending is 2.5% above pre Covid levels it is 5.3% above pre Covid levels outside NSW and Victoria.
However, by the December quarter, with the savings rate converging on that 6% equilibrium level and households becoming increasingly stretched by further increases in the cost of living (food; rents; energy); rising interest rates and falling house prices we anticipate that momentum in consumer spending will slow appreciably.
That lacklustre momentum will extend into 2023 with consumer spending growth likely to slow from 6% in 2022 to a below trend 2.5% in 2023.
In turn businesses who are currently generally quite upbeat will have to review their investment plans. We expect business investment growth to slow from 8% in 2022 to 4% in 2023.
Another key factor behind our downward revisions to growth in both 2022 and 2023 is the dwelling construction cycle.
Detached house dwelling approvals have been signalling a very strong cycle, but dwelling construction contracted for the second quarter in a row in the March quarter. Activity has been clearly impacted by labour / material shortages, and runaway costs.
Projects are taking longer to complete while some are being shelved. We have lowered our forecast for dwelling construction growth from 9.4% to 5.6% in 2022; and pushed some of the Home Builder related activity into 2023 but severely written down overall activity, particularly in the second half of 2023.
Supply and demand for new dwellings is expected to dry up under the weight of high costs; labour shortages; and restrained demand.
These forecasts are heavily reliant on our policy; wages; and inflation forecasts.
We have not changed those key parameters: peak in RBA cycle of 2.25% by May next year; peak to trough fall in house prices of 14% to mid 2024; inflation moving back toward the target zone by end 2023; wages growth to peak in 2023; the unemployment rate to bottom out at 3.2% by end 2022 and increasing in the second half of 2023 as demand slows and overseas migration returns to pre Covid levels by end 2024.
