Rates, Growth and China: What Will Cause Economic Headwinds in 2023 | Australian economy

a A safe prediction for 2023 – or any year – is that many forecasts will be wrong, not least in the world of economics and financial markets. As Daniel Kahneman, the Nobel Prize-winning economist, notes in his book, Thinking Fast and Slow, “[everything] It makes sense in hindsight…the illusion that what we understand is in the past fosters overconfidence in our ability to predict the future.”

The end of the year (plus a slump in market-moving economic news in Western economies, at least) presents an inevitable opportunity to highlight the poor outlook of the previous 12 months and try to draw lessons for the year ahead.

Late examples include A bloomberg A piece on the “wild reckoning” of Wall Street’s “top stars” in misreading inflation risks. The EconomistMeanwhile, he describes 2022 as a “brutal inflation year” that could leave us worried about unemployment in a year’s time as higher official interest rates hit demand everywhere.

Here, though, are some of the safer bets for 2023.

Chinese distortions caused by the Covid virus will be a major focus

China, the world’s second largest economy after the United States, has been the main driver of growth this century. It is easily Australia’s largest market, accounting for about a third of exports and accounting for the same amount The next five are the largest Mutual.

even before chinaScreaming U-bendTo abandon the zero Covid policy, the Reserve Bank of Australia defined growth in the Middle Kingdom as One of the three major uncertainties related to the outlook. (The other two factors are continued high inflation and the fate of consumer confidence amid rising interest rates.)

An exit from the tight controls of the pandemic would cause “significant economic disruptions” for China, a senior RBA official told The Guardian Australia. One question is how China real estate market swing will fare. Another thing is whether the newfound freedoms will exacerbate spending, given China’s volatile income support during lockdowns.

Beijing is widely tempted to resort to its standard approach to reigniting growth through big construction spending. This tactic has propped up prices for Australia’s biggest export – iron ore – in the past and investors are betting it will again.

The price of iron ore will end in 2022 near the level it started in the year (at American dollar). The Australian Federal Treasury rates at a moderate $55/t for budgets, a level it hasn’t been in over a decade (except for a period between mid-2015 and 2016). Source: Trading Economics pic.twitter.com/d8pKi5sHQP

– @phannam @mastodon.green (p_hannam) December 30, 2022

Of course, long-term predictions are fraught with danger. Roland Raja and Alyssa Ling at the Lowe Institute Caution in March China’s future is less rosy than many expect, short-term contortions around Covid aside.

The main drawbacks are China’s aging and shrinking population, the gradual decline in its already poor levels of productivity (compared to other East Asian economies with similar wealth levels) and diminishing returns from its concrete and masonry economic model.

This deep slowdown in the Chinese economy is kind of happening in one form or another. All the risks are really on the downside, Raja said. “We continue to see a very significant slowdown in the coming years and decades.”

Australian interest rates will rise further

None of them expected the RBA to raise its value Principal interest record eight consecutive months, starting in May. This is mostly due to the sudden Russian invasion of Ukraine in February.

Russia’s oil and gas exports were disrupted by subsequent sanctions, and the two warring nations were solely responsible for this 12% of calories circulating worldwide.

Katherine Birch, chief economist at ANZ, said inflation was expected to be “transient, short and sharp” due to supply chain disruptions and economies surging to power through the pandemic. The war meant that central banks expanded insurance against recessions and “left it out for too long” to raise interest rates to curb price hikes.

ANZ and Westpac both expect the RBA to raise the cash rate from 3.1% now to a peak of 3.85% in 2023. The two big banks, the CBA and NAB, the central bank, expect it to come in at 3.35% and 3.6%, respectively. Investors have recently been pulling back from the high of 4%.

Investors have priced in an impressive RBA cash rate of 4% by the end of 2023, up from 3.1% now. (Most economists expect the rate to peak below the level.) pic.twitter.com/RBlxHc5e8C

– @phannam @mastodon.green (p_hannam) December 30, 2022

Each 25 basis point rise in rate adds about $75 to the monthly payments on a typical 25-year, $500,000 mortgage, according to RateCity. The 300 basis point increase since May has added about $834.

Many of those with fixed interest rates have yet to feel the impact. But as Sally Tyndall, Head of Research at RateCity, observed last month That about one in three mortgages outstanding with specific conditions and two-thirds of these loans will expire by the end of 2023. For these borrowers, higher rates are inevitable.

Economic growth will slow

Higher borrowing costs, which aim to dampen demand from households and firms alike, mean that major economies are likely to slow, if not contract, in 2023.

Australia’s GDP expansion will halve from around 3% in 2022 to 1.5% in both 2023 and 2024, the RBA predicted. The direction of travel is widely agreed upon by economists if not the exact speed.

Even if a rising population means that per capita GDP growth could end up near zero or even feel stagnant, An abundance of job opportunities in Central Australia The lowest levels of unemployment in half a century It is one reason for optimism.

A strong labor market supports our view of the relative resilience of Australian economy In 2023, Birch said.

The RBA advises that the unemployment rate should remain at around 3.5%, or close to current levels, through mid-2023. By the end of 2024, it could remain around 4.25%, a level any treasurer since the early 1970s would have accepted.

Bankruptcies will rise

Rising interest rates are exposing businesses (and households) who have borrowed too much, so the increase in defaults appears to be yet another in 2023.

The end of the Covid ban on these foreclosures means there is already less of a clearing up of businesses to compensate, said Christine Biddle, director of general practice at CPA Australia and a former registered liquidator.

and the collapse of the Clough Group earlier this past December Possible side effects of projects Like Snowy Hydro’s giant water pumping project, it was the latest blow to the construction industry. Biddle said rising raw material costs and labor shortages have hit the sector particularly hard.

She added that “pain points” also appear in industries such as hospitality. Continuing work-from-home habits have reduced foot traffic in the heart of major cities. Melbourne, for example, was designed around people coming into the CBD, so the downturn has been “very bad” for restaurants and cafes.

The interest rate “slope” of expiring fixed rates will also affect the business. One major bank recently told Beadle that as many as 70% of its customers will switch from a fixed rate to a variable rate early next year, which would raise repayment rates from 1.5%-1.9% to 5%-7%.

“At times like this, the managers or the employer will actually stop paying themselves so they don’t get paid,” Biddle said. “It really puts them personally at risk of not being able to maintain their debt levels.”

Energy prices will rise

Regardless of the prices of gasoline and diesel that fluctuate with global fluctuations, the prices of gas and electricity will rise more in 2023.

This though Very unusual intervention in energy markets in December by the Albanian government to cap gas for 12 months at $12 a GJ and $125 a ton for black coal. The federal government will also pay out $1.5 billion in consumer support.

The Treasury estimates that energy prices in fiscal year 2023-24 will continue to rise 23%, which is a sharp increase but better than the 36% their models suggest would have been the case without the entry into the markets that some have derived as Soviet Light or even Armageddon.

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Recent declines in wholesale electricity and gas prices will eventually offset retail prices but that is assuming they persist.

Extreme weather, made worse by climate change, is expected to test our energy and other major grids as it has increasingly done in recent years. Should El Niños form in the Pacific Ocean three years after La Niña? Display of event models is possible – We may face some big energy and other challenges by this time in 2023.

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