WEEKLY E-MAIL

7 August 2023

THE DILEMMA OF AUSTRALIA’S ECONOMY

By Jonathan Toh

Australia’s economy is experiencing a mix of positive and negative signals, making it difficult to get a clear picture of its health.

On the one hand, the Reserve Bank of Australia (RBA) has found that more than 15% of borrowers struggle to meet their mortgage repayments due to negative cash flows as a result of the rapid increase in interest rates over the past 12 months. This is evident through a surge in delinquencies on home loans from non-bank lenders. However, on the other hand, the country’s unemployment rate continues to remain stubbornly low at 3.5%, and credit card spending remains strong, indicating consumer confidence.

Contributing to these mixed signals are the substantial cash buffers built up during the pandemic, with an estimated cash buffer of around $300 billion, or about 20% of annual household income. Even more surprising is that Australia’s cash buffers are larger than in other G7 countries. These savings have acted as a cushion, helping the economy weather higher interest rates more effectively.

Another set of data that the RBA needs to grapple with is the rebound in the housing market. CoreLogic reported its national Home Value Index rose by 0.9% for the last month ending July, mainly due to the demand for housing from returning overseas migration and a lack of housing supply. This contributes to a rebound in home prices, a trend that will likely continue in the short to medium term.

From an inflation perspective, core goods inflation saw a slowdown. However, service inflation continues to remain sticky, and with the increase in National Minimum Wage from 1 July 2023, it will likely put further pressure on inflation.

As we look forward, there are obvious signs that inflation is likely to remain elevated, driven by rising award wages that will impact a significant portion of the workforce, a low unemployment rate of 3.5% indicating ongoing high demand, robust spending in areas like eating, drinking, and recreation activities, and the rebounding housing market. All this means that additional monetary policy adjustments are likely, to ensure inflation falls back to the targeted range of 2-3% per annum.

Jonathan Toh
Associate Financial Planner
Authorised Representative No. 1284667

If you have any questions or comments, please email me at jonthan@gfmwealth.com.au

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