Bleak Outlook for Australia’s Economic Growth in 2023: New Research

Shoppers walk around Pitt Street Mall in Sydney, Australia, on June 07, 2022. Brendon Thorne/Getty Images

A new report has shown that Australia’s economic growth will continue to slow down amid the recent turmoil in the global banking system.

The Westpac-Melbourne Institute leading index rose slightly from -1.04 percent in January to -0.94 percent in February.

This is the seventh consecutive month that the growth rate has remained in negative territory.

The index tracks nine economic indicators, including consumer confidence, housing, stock market prices, money supply, and interest rate spreads, to predict the Australian economy’s direction in the next three to nine months.

A negative reading indicates that the economy is growing below the trend in the short term.

Bleak Growth Outlook for Australia’s Economy

The report said the latest figures aligned with Westpac Bank’s forecast that the Australian economy would only achieve a one percent growth in 2023.

This is much lower compared to the 2.7 percent growth recorded in 2022 and 4.2 percent in 2021.

Westpac chief economist Bill Evans listed several factors that contributed to the slowdown of the economy: the lagged effect of the central bank’s interest rate hikes, a sharp fall in the real wage, a bottoming-out of the savings rate, as well as the volatility in the global banking system.

Westpac predicted that these factors would continue into the following year, resulting in a below-the-trend growth of 1.5 percent for the economy in 2024.

A man wearing walks along a street in the central business district of Sydney in Australia on June 25, 2021. Saeed Khan/AFP via Getty Images

“Recent developments in the global banking system are unlikely to impact Australia’s financial system significantly but will be a further headwind for the major advanced economies, particularly through a reduction in credit availability and knock to confidence,” Evans said.

“This, in turn, will have indirect implications for Australia’s growth prospects.”

Regarding the leading index, Westpac expected it to remain negative for the rest of 2023.

At the same time, Westpac updated its cash rate prediction for the next two months.

Pointing to the Reserve Bank of Australia’s (RBA) March meeting minutes and recent developments in global financial markets, Westpac predicted a pause for April.

However, the bank believed the RBA would resume its interest rate hiking cycle in May with a 0.25 percent increase.

“ We do not expect that a decision to pause in April will mark the end of the cycle. New information will be available for the May board meeting, particularly around inflation and the staff’s revised economic forecasts,” Evans said.

Business Risks Surge as the Economy Slows Down

As the economy slows down, more Australian businesses have problems with cash flow, leading to a surge in business-to-business trade payment defaults.

According to the latest CreditorWatch’s monthly business risk report, payment defaults jumped 30 percent in the year to February 2023, while credit enquiries increased by 102 percent.

The agency’s business risk index also showed that projected default rates for most regions around the country were likely to rise considerably in the next 12 months.

In addition, business-to-business trade receivables dropped by 10 percent in the past year.

There was an upward trend in insolvencies as external administrations rose by 46 percent from January and February to a near 24-month average.

The construction industry saw the largest number of external administrations (125 cases), while the food and beverage services industry had the highest risk of default.

Meanwhile, court actions returned to pre-COVID-19 levels, standing at their highest point since March 2020.

CreditorWatch chief economist Anneke Thompson said the gloomy picture of the business sector was due to high inflation, rising interest rates, supply chain problems, labour shortages and falling consumer demand.

“The economy is in the early stages of its downturn,” she said.

“Prices are still rising, although we appear to have the worst of the price rises behind us, interest rates are likely to need to increase further, and consumer demand is slowing and will continue to slow.”

Thompson also noted that smaller businesses relying on discretionary spending were feeling the immediate impact of the economic slowdown, which would later flow through to the rest of the economy.