2023 Outlook: Australia

Feature Stories | Dec 15 2022

There’s not much we can do to control commodity prices. Otherwise, the biggest risk to Australia’s economy next year is the housing market.

-Banks and resources supported ASX200 in 2022
-House prices to fall the most in record
-Reverberations through the wider economy
-Where the bloody hell are ya?

By Greg Peel

As we head towards Christmas, consensus expectation is that Europe is already in recession, the US will likely see a recession from early next year and Australia will see significant slowing, but not a recession.

Beijing would never allow China to enter recession, but GDP growth may still slow to below the government’s 5.5% target. Forecasts have been as low as 3% but that was when it looked like there would be no change to zero-covid. Now that China is moving away from zero-covid, and is continuing to support the stricken Chinese property sector, the signs are more positive.

A rapid growth in covid cases as a result of reopening is the negative offset. With a low level of vaccinations to date, and Beijing refusing on principle to purchase mRNA vaccines developed in the West, growth could well slow anyway without zero-covid, if the economy is struck down by illness.

It is notable that as of yesterday, Beijing will no longer report a daily case-count, as the end of mandatory PCR testing means numbers would never be accurate.

This, of course, provides a swing factor for the global economy, and particularly the Australian economy, which is highly dependent on commodity prices.

At the time of writing, the S&P500 is down around -15% year to date while the ASX200 is down only -3.7%. The balance of performance is nonetheless misleading. The US stock market is dominated by technology-related companies, and particularly a small handful of Big Tech names, which have been trashed this year on aggressive Fed tightening due to the impact on longer duration valuation.

The Australian market is dominated by banks and resources.

On a trade-off between the margin benefits of higher RBA cash rates and the risk of loan defaults, Commonwealth Bank ((CBA)) hit an all-time high in late November. Oil & gas giant Woodside Energy ((WDS)) came close to a five-year high in early November.

Whitehaven Coal ((WHC)) hit an all-time high in early October having rallied some 800% in a year.

The pandemic brought us inflation. The war exacerbated the issue. While Chinese lockdowns held back some commodity prices, the European energy crisis ensured runaway prices for LNG and thermal coal.

Australia has its own share of technology stocks, but they are still just a small part of the index.

Commodity prices remain an important determinant of GDP growth (or lack thereof) and of the trajectory of the ASX200. But they are largely out of our hands.

Closer to home, there’s a different problem.

Safe as Houses?

In Australia, the most interest rate sensitive area of the economy, and the one to yet fully bear the pain of interest rate adjustments, T. Rowe Price believes, is housing.

“This has big implications for the broader economy and investors.”

How far can house prices fall? T. Rowe believes the correction will likely erase all of the house price gains of the covid period, during which prices soared to unsustainable heights. This would equate to the largest peak-to-trough decline on record, vastly eclipsing the previous -10.2% correction of 2017.

Morgan Stanley suggests the impact of this year’s RBA rate hikes will hit in 2023, and house prices will fall “the most on record”.

Peak to trough, Citi expects house prices to decline by -23%. Forecasting a peak RBA cash rate of 3.35% (which is at the low end of consensus), Citi anticipates prices will trough in the December quarter next year.

But the broker also offers a wide range of bull-bear case outcomes. If rates are not lifted as high as forecast and population growth provides demand support, Citi forecast only a -15% decline. The bear case scenario is -33%.

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