Australia’s economy stubbornly defied predictions during 2023, dashing any hopes that we might begin to return to some kind of normal.
Some had expected an end to the Reserve Bank’s continued cash rate rises during the year. Instead, inflation has been a stubborn foe and we saw five rate rises. On a positive note, superannuation funds bounced back after losses in 2022 with SuperRatings reporting the median balanced option can expect returns of 9.6% in 2023.i
The big picture
Global economic forecasts for 2023 were also beset by a number of wild cards during the year. While many economists were predicting recession in the United States and Europe and a rebound in China, the year ended differently with no recession in the US, Europe struggling but doing better than expected and China still battling some headwinds.
October brought concerns of a wider Middle East conflict, the International Monetary Fund saying that an escalation of the conflict could be far-reaching, affecting tourism, trade, and investment.ii
Inflation and interest rates
In Australia, economic growth slowed a little on 2022’s result but still delivered a better return than forecast. The economy grew by 2.1% although a larger-than-expected increase in the population is putting extra pressure on housing and prices, keeping inflation higher.iii It was the eighth quarter in a row of economic growth.
The rising cost of living is proving harder to tame than hoped or expected despite continuing cash rate rises.
Consumer prices rose 1.2% during the quarter and 5.4% over the year. On a CPI basis, rents rose 7.6% in the past twelve months, which was the largest annual increase since 2009.iv The Reserve Bank continued its battle to get inflation under control, raising the cash rate five times to finish the year at 4.35%.
Sharemarkets
Global sharemarkets ended 2023 on a more positive note. In the US, welcome news from the Federal Reserve of an end to rate hikes saw stocks and bonds soar in the final weeks of the year. During the year, the Dow Jones index increased by 13.7% and the Nasdaq by 43.4%. There was mixed news in Asian markets with a jump of 28.2% on the Nikkei 225 but China’s Shanghai Compositive fell 3.7%.v
Australia’s sharemarket may not have experienced the heady double-digit returns of some global markets but it ended the year with a gain of almost 8%, marking its best performance since 2021.vi
Commodities
Despite big falls from the peaks of 2022, commodity prices remain high across the board.
Iron ore, Australia’s biggest export, rose more than 21% as the Chinese government continues to create strong demand by stimulating property and infrastructure development.
Oil prices saw some spikes during the year but steadied by December. However, the World Bank notes that conflicts in the Middle East and Ukraine, could cause a major oil price shock, pushing global commodity markets into uncharted waters.vii
As the US dollar gathers strength and Australia’s high inflation figures persist, the Australian dollar is under pressure. It ended the year where it began after recovering from a slide in the second half of the year.
Property market
While rising interest rates usually dampen property prices, by year’s end we saw a remarkable turnaround for some cities in another result that upended forecasts.
CoreLogic’s national Home Value Index rose 8.1% in 2023, up from the 4.9% drop in 2022 with a patchy performance across the country.viii
House prices rose at more than 1% every month on average in Perth, Adelaide, and Brisbane in the second half of the year. While Melbourne values dropped in November and December, Sydney and Canberra prices barely moved, and Hobart and Darwin prices fell slightly.
Looking ahead
As floods and storms ravage the eastern states and bushfires break out in the west, another tumultuous Australian summer might be mirrored by a chaotic year for the economy both in Australia and overseas.
The RBA expects economic growth to remain subdued but resilient in 2024, and is confident that inflation will continue to fall slightly throughout the year.ix
Worldwide, China’s spluttering economy and the outcome of the US presidential election may cause ripple effects across the globe, meanwhile markets will be nervously watching the ongoing conflicts overseas which have the potential to create broader economic challenges.
Whatever the year ahead brings, we are here for you.
i https://www.afr.com/policy/tax-and-super/super-balances-grow-almost-10pc-thanks-to-tech-rally-20240103-p5euwb
ii https://www.imf.org/en/Blogs/Articles/2023/12/01/middle-east-conflict-risks-reshaping-the-regions-economies
iii https://www.abs.gov.au/media-centre/media-releases/australian-economy-grew-02-cent-september-quarter
iv https://www.abs.gov.au/articles/11-things-happened-australian-economy-during-september-quarter
v https://www.businesstoday.in/markets/story/global-market-performance-heres-how-global-equity-markets-major-currencies-performed-in-2023-411391-2023-12-31
vi https://www.abc.net.au/news/2023-12-29/asx-markets-business-live-news-dec29-2023/103271578
vii October 2023 Commodity Markets Outlook: Under the Shadow of Geopolitical Risks [EN/AR/RU/ZH] – World | ReliefWeb
viii https://www.corelogic.com.au/news-research/news/2023/australian-home-values-surge-in-2023
ix https://www.rba.gov.au/speeches/2023/sp-ag-2023-11-13.html
