After rebounding from 2020, the world economy is facing strong headwinds again. Global growth is forecast to slow from 6.1% in 2021 to 3.6% this year. Challenges abound, from the war in Ukraine and new waves of COVID-19 infections to inflation and supply chain problems. With increased uncertainty, the International Monetary Fund does not expect growth in 2023 to be better. In fact, the organisation lowered its forecast for that year from 3.8% to 3.6%, suggesting that economic drivers are faltering.
Australia continues to do better than many other economies, thanks to a rollout of government fiscal measures over the past two years. The national jobless rate remains at a record low of around 3.9%, and after expanding by 4.7% (real GDP) in 2021, the economy is forecast to grow by 4.2% this year. The country is not immune, however. Strains on global supply chains are driving prices up. Combined with sluggish wage growth and rising borrowing costs, households have less buying power while dealing with more financial pressure.
Australia’s housing market defied predictions of a massive slowdown due to COVID-19. Prices across the country rebounded above their pre-pandemic levels, rising by nearly 24% year on year in the last three months of 2021. But after a boom fueled by super cheap home loans, the market is showing signs of a slowdown, led by Sydney and Melbourne. Rapidly rising interest rates and prices of goods are squeezing borrowing capacity. As a result, demand for housing is expected to taper off for the rest of 2022 and into 2023.
The era of ultra-low interest rates is over. In three months, the Reserve Bank of Australia lifted the official cash rate to 1.35% from a low of 0.10%. Government data shows banks raised their variable rate for outstanding owner-occupier loans from 2.86% to 3.07% in May 2022 alone – and from 3.21% to 3.42% for investment loans. With economists expecting another rise in the cash rate, the costs of borrowing have nowhere to go but up.
Mortgage brokers recently delivered an impressive performance. Latest industry data shows they settled $165.9 billion in residential loans between April and September 2021. This was up by 54% over the previous year and the highest value an industry association has ever recorded. On average, each broker settled $9.1 million in home loans, up from $7.2 million during the previous six months. Brokers’ efforts to diversify their business, particularly into commercial lending, should help ease the impact of an expected housing market downturn.
Australia’s major banks remain resilient, keeping a robust position with strong asset growth and capital returns. But years of record-low interest rates have squeezed margins. Net interest margins have continued to decline due to fierce competition. Recent increases in the cash rate should take some of the pressure off margins. But they may slow demand for credit at the same time as it becomes more expensive to borrow money from banks.
Huge government spending in response to the pandemic resulted in an underlying cash deficit of $79.8 billion or about 3.5% of nominal GDP in 2021–22. The government expects the shortfall to narrow to $78 billion in 2022–23, before falling to $43.1 billion or 1.6% of GDP in 2025–26. On a more positive note, Australia logged a surplus on its current account for a 12th consecutive quarter, from January to March 2022. It also ran another trade surplus, partly thanks to the soaring energy demand and prices.