Analysis

Will 2024 finally be a happy new year for the Australian economy?

When we said "happy new year" last week, for the first time in quite a while it may actually turn out to be true, at least in an economic sense.

Subsequent events might have largely erased it from memory, but Australia's economic performance between 2013 and 2019 was so poor that one of our leading economists, Ross Garnaut, described the period as the nation's "dog days".

In 2020 and 2021 we went through COVID lockdowns that shuttered vast swathes of the economy for months at a time.

Sure government stimulus bailed out most businesses and many individuals but, despite various booms the cash splash ignited, it wasn't a particularly joyous time for most.

The end of lockdowns and reopened borders in 2022 promised much but instead delivered a war in Ukraine, which exacerbated COVID supply chain disruptions rubbing up against stimulus-fuelled demand, stoking the highest inflation in decades.

Along with the inflation came the biggest jump in interest rates for more than a generation, after a general trend of falling borrowing costs since the early 1990s.

Those rates kept rising in 2023 as what was once thought of "transitory" inflation proved a lot more stubborn to contain than many economists, including those at major central banks, expected.

Inflation and rates expected to head down

So, after what has been a miserable decade for the average working-age Australian, what are the causes for optimism in 2024?

First among them is the expectation that the stubborn inflation, which peaked just below 8 per cent on an annual basis in December 2022, will continue on its downward trajectory.

The most recent monthly numbers had annual price rises at 4.9 per cent over the year to October and most economists expect that to fall to 4.5 per cent when the latest November figures come out tomorrow.

CBA's economists are hopeful that annual inflation might even start with a three when the December figures are released near the end of this month.

That kind of forecast has traders on the financial markets fully pricing in a Reserve Bank rate cut by September this year, on hopes that inflation will be close to coming within the RBA's 2-3 per cent target by then and still on a clear downward trend.

Many think the first rate cut might come as early as June.

Wages to beat price rises

The second cause for optimism is that wage growth exceeded price growth for the past couple of quarters, meaning working Australians on the whole are no longer suffering continued real wage cuts.

Treasurer Jim Chalmers was out yesterday spruiking that fact.

"We've seen the fastest wages growth in 15 years, and what these new numbers show is that people on the lowest pay are getting the biggest percentage increases," he told reporters at a press conference he called to release some new Treasury research.

Those figures showed, while wages growth was around 4 per cent overall over the year to September, it was 6.7 per cent for the lowest paid group and around 5 per cent for the second lowest paid quintile of workers.

That was largely due to a big increase in minimum and award wages from July 1 last year, which mostly affected lower income workers.

By way of contrast, the top quintile, or 20 per cent, of income earners saw their pay packets rise a more modest 3.2 per cent.

He also hinted that those lower income groups might benefit from additional cost of living assistance in the budget on top of electricity rebates, increased rent assistance and bigger childcare subsidies already implemented.

"If there's more that we can responsibly do between now and in the May budget, then obviously, we will consider that," the treasurer said.

Disposable incomes to rise as taxes fall

That brings us to the third cause for optimism, this time for those higher income earners whose pay packets generally haven't been rising as quickly.

From July 1 this year, someone with taxable earnings of $200,000 a year will see their income tax bill fall by $9,075 from close to $61,000 a year to less than $52,000.

That's a 15 per cent tax cut and, instead of paying more than 30 per cent of their taxable earnings to the ATO, they'll be paying less than 26 per cent.

Or, to put it another way, the stage three tax cuts legislated by the Coalition and retained under Labor will give this person a 6.5 per cent take home pay rise.

This income level gets the maximum benefit from the tax cuts, but other middle to high income earners will see smaller take home pay rises in the second half of this year.

The net result of falling inflation, falling interest rates, falling income tax rates and rising wages — should they occur as expected — will be a big rise in real disposable incomes after close to a decade of stagnation and, lately, two years of decline.

Inflation risks remain

But there are risks.

One is that this very rise in disposable incomes will undermine the weakening in demand needed to reduce inflation, thus keeping price rises and interest rates higher for longer.

HSBC Australia chief economist Paul Bloxham believes this is likely.

"We see this as supporting consumer spending and inflation, given we expect consumers to treat the tax relief as additional income, for which they have a higher marginal propensity to consume out of," he wrote.

He thinks Australians will need to wait another year for interest rate relief.

"Our central case is that the RBA is likely to be on hold through 2024, with cuts not arriving until 2025," Bloxham cautioned.

Another factor that might keep inflation rising and delay rate cuts, not only in Australia but globally, is the risk of escalating conflict in the Middle East and a drought affecting the Panama Canal's capacity disrupting shipping, with the former also threatening energy supplies.

But Capital Economics senior global economist Simon MacAdam believes that disruption and rise in shipping costs will not be large enough to meaningfully boost inflation, especially given that demand for goods has weakened and shipping capacity has increased.

"Even when there was a huge increase in shipping costs at a time when firms had pricing power to pass them onto consumers in 2021, we estimated that the overall impact was to boost global headline inflation by just 0.3 percentage points over 2021-22," he wrote.

Recession remains a real possibility

There are also geopolitical risks elsewhere, with around half the world's population going to the polls this year, notably in the US, EU, India, Indonesia and Taiwan.

While the US election is late in the year, the campaign is likely to be brutal and could unsettle financial markets, especially with the lingering risk of a US government shutdown amid budget disputes.

Taiwan's election is this Saturday and could either escalate or ease tensions with China.

The other major risk is of recession, as the past two years' interest rate rises finally catch up with consumer spending, business investment and debt defaults.

AMP's chief economist Shane Oliver puts the recession risk in Australia at around 40 per cent, which is probably a fair call given that the nation was already in a per capita recession for most of 2023.

"Most countries have not seen a spending boom that needs to be unwound; in Australia consumer spending, housing investment and business investment are not running at excessive levels relative to GDP."

In other words, we already took a lot of the pain without a technical recession last year, so we're not exactly falling off a high base.

In the words of D:Ream, perhaps things can only get better.

Here's hoping those wishes for a happy new year aren't hollow once again.