The economic outlook for the world economy is softening as the year progresses. Inflation has peaked but remains well above target levels, with core inflation in many economies being stubbornly persistent. Central banks are now applying strong-arm tactics to slow aggregate demand, with the increasing likelihood that some Western economies will get tipped into a shallow recession as a result.
A slowing in aggregate demand is now anticipated to push Australia into a stagnation economic profile for the remainder of 2023 and into the first quarter of 2024.
- The Australian economy entered 2023 relatively strongly, however the first quarter of year has seen output growth slow considerably as higher interest rates and inflation start to bite. Overall GDP growth of 0.2 percent for March Quarter 2023 was driven by domestic demand (+0.6 percent), with net exports (-0.2 percent) and inventories (flat).
- With population growth running at 0.5 percent for the quarter, per capita GDP growth recorded a negative outcome at -0.2 percent – the first time this has occurred, excluding the period of the COVID pandemic, since 2018. More concerningly is the continued decline in productivity, which has seen the annual change in real GDP per hour worked fall for the past four quarters – and at an increasing pace. Conversely real unit labour costs have swung around in the March quarter recording 1.1 percent annual growth.
- This situation of falling productivity and rising wages is worrying. How much of this reflects a timing difference between businesses gearing up with new staff and new plant and equipment (which is running at a rolling four-quarter annual growth rate of 5.4 percent), and how much of this reflects a structural challenge in the economy is difficult to disentangle.
Australia’s labour market is also expected to weaken, with the unemployment rate pushing up from its current low level of 3.6 percent to high-4 percent range by end of 2024.
Inflation may have peaked, but upside risks could make the monetary policy tightening more challenging.
- Inflation dynamics are being driven by a divergence between goods inflation and services inflation. Goods inflation has steadily declined as supply chain problems that emerged during the pandemic have now evaporated and global shipping costs have normalised. Furthermore, demand – especially for durable goods – has ebbed as consumers tighten discretionary spending in response to higher costs of living. While headline inflation appears to be rapidly falling in some developed economies, core inflation remains problematically high, driven largely by a surge in the demand for services back to pre-pandemic levels.
- The World Bank's June 2023 Global Economic Prospects warns of a fragile world economy throughout 2023 and 2024, with a higher risk of a deeper downturn if financial market instability persists and more aggressive contractionary monetary policy are required to address inflation. Global growth is now expected to fall to around low-to-mid 2 percent range in 2023, gradually picking up to mid-to-high 2 percent range in 2024 and around 3 percent in 2025.
- Trade volumes have been declining, since the first quarter of 2022. However, there was a slight improvement in the first quarter of this year as semiconductor supply issues were resolved and external demand from China rebounded after the reversal of its zero-COVID policy. Nevertheless, shipping volumes and transport prices remain low, and weak demand in the manufacturing sector indicates that trade volumes will likely remain soft in the near term.
- With high inflation causing concerns about the cost of living worldwide, there is limited room for expansionary fiscal policy. Implementing such policies is likely to prolong the inflationary challenges addressed by monetary policy. Additionally, many economies have exhausted their fiscal resources due to the various government support programs implemented during the COVID-19 pandemic.
KPMG expects global headline inflation to continue to decline through the remainder of 2023, reflecting the easing of supply issues as well as the lagged impact of monetary policy tightening.
*values at end of period
Full details about the Australian economic conditions and forecasts can be found in KPMG's Australian Economic and Outlook: Q2 2023.