What will happen in 2023? Expert forecast for business

Speaker 1:
This is With Interest, a business, finance, and accounting news podcast brought to you by CPA Australia.

Dr. Jane Rennie:
Hello and welcome to With Interest. I'm Dr. Jane Rennie, General Manager Media and Content at CPA Australia. This is the first With Interest episode for 2023 and so, we thought it fitting to look into our crystal ball and give you CPA Australia's predictions for business and the economy in 2023. What could possibly go wrong? Joining me to provide these expert prophecies is our very own Nostradamus, Senior Manager of Business Policy at CPA Australia, Gavan Ord. Welcome to With Interest, Gavan.

Gavan Ord:
Glad to be here, Jane.

Dr. Jane Rennie:
Gavan, I feel a bit mean putting you on the spot like this and asking you to tell us what to expect in 2023. If we've learned anything from the last few years, it is to expect the unexpected. In fact, the Collins Dictionary 2022 Word of the Year was permacrisis, meaning an extended period of instability. But if nothing else, I think making predictions about the next 12 months ahead will give us something to laugh about when we reach the end of the year. We could even do a retrospective podcast in December and perhaps call it, How Wrong We Were. So I'm going to start with some quick questions about where we are now in the economic cycle, the sorts of things that trip politicians up during an election campaign. My first question is this. Inflation spent most of the last year trending north, where's the inflation rate at now?

Gavan Ord:
So on December, it's at 7.3% which is a 30-year high.

Dr. Jane Rennie:
You mentioned December, that was when the last RBA board meeting was. What happened to interest rates at that meeting?

Gavan Ord:
The RBA increased interest rates by 25 basis points to 3.1% and that's the eighth consecutive rate rise by the RBA.

Dr. Jane Rennie:
Eight in a row. Well, looking now at some labour force stats, what's the current unemployment rate?

Gavan Ord:
That's at a very low 3.4% so that's at a 48-year low.

Dr. Jane Rennie:
We are coming to the end of the holiday period also. How are trading conditions in the lead up to Christmas and over the new year?

Gavan Ord:
Yeah. This is an interesting question, Jane, because we're still waiting on the retail sales data, the official data to come out. But what we're hearing from members is actually, and what we're hearing in the media, is retail sales are pretty strong over that Christmas period and leading up to Christmas and have remained strong after Christmas as well.

Dr. Jane Rennie:
And so, in the year to Christmas, how were Australia's economic conditions? How would you describe Australia's economy last year?

Gavan Ord:
Well, I would describe it as one of an expansion. The economy grew quite strongly. However, economic growth slowed in the second half of the year and risks started to emerge and the big risk that emerged economically last year was inflation, inflation journey got out of the bottle last year.

Dr. Jane Rennie:
Was that general trend broadly comparable with Australia's other major trading partners?

Gavan Ord:
Broadly, yes. Australia's probably a good three or four months behind other major economies in terms of inflation but most major economies rebounded quite quickly in 2022 from obviously, COVID-induced challenges in 2020 and 2021. The only major economy that didn't grow as fast as expected was China but that was mainly because they pursued a COVID zero policy until towards the end of 2022.

Dr. Jane Rennie:
Right. So that's a bit of scene setting. Now, I'd like to look at where some of these stats might trend in 2023 and starting again with inflation. Cost of living is of course the main pressure point for many Australians right now. Has inflation settled yet or do you expect it to keep rising?

Gavan Ord:
Look, I think for Australia at least, I think it's going to continue to rise a little bit. Maybe the pace of the growth and inflation might come down but I expect it to rise over the next few months at least. I know that the Reserve Bank is expecting inflation in Australia to peak at 8% and as I said before, it's currently at 7.3% so there might be a little way to go before we start to see inflation come back to more normal levels.

Dr. Jane Rennie:
I know in fact when you and I have talked about inflation, you've talked about what's happening overseas and is it right I understand that Australia is typically a couple of months behind the global trend?

Gavan Ord:
Yeah. So some of the listeners may have seen that inflation in the US and Europe has started to slow and that started November, December so many people expect that inflation to slow on those markets but I think Australia's probably got another three, four months to go before we start to see inflation come down like it is now starting in US and Europe.

Dr. Jane Rennie:
So what's your prediction, Gavan, then for what CPI in Australia will peak at?

Gavan Ord:
Look, I think RBA is probably about right at around about 8%. It might peak a little bit lower than that mainly because our major trading partners, inflation rates starting to come down. But also, if you look at China, their inflation has remained under control so it might peak just a little bit below 8% and then by the end of this year, maybe somewhere around 4%, 3% to 4% range by the end of the year.

Dr. Jane Rennie:
If inflation still has a way to go before it hits its peak, it feels inevitable that the Reserve Bank will keep raising interest rates. They didn't actually meet in January so by default, we had a reprieve from interest rate rises. Do you think though they will continue on a monthly basis to raise the interest rate?

Gavan Ord:
I think interest rates will continue to rise. It may not be every month as we've been experiencing for the last eight but I still think the trend is on the way up before they peak. As I said, they're around about 3.1% now and we might see interest rates head up to around about 4% but where the Reserve Bank stops really depends on the economy. If the economy tanks, then they'll start to cut interest rates but that doesn't seem likely at this stage so it took maybe two, three, four interest rate increases to go before we start to stabilise.

Dr. Jane Rennie:
Interestingly, despite these interest rate rises, we've heard from accounting professionals that consumers haven't started to change their spending behaviours. What do you think is behind that?

Gavan Ord:
Yeah. That was a really interesting observation from our members. Obviously, it wasn't universal but many of our members noted that their clients hadn't experienced decline in sales yet. Now, what are some of the reasons for that? Well, some of the pain of the interest rate increases hasn't yet flowed through so quite a lot of people are on fixed interest rates, very low rates at around 2%. So they actually haven't yet started to pay the full rate, the variable rate, whatever. It is around 6% now. The other thing to note is during COVID, a lot of people reduced their spending so their household savings were up and the accounting turned. Their balance sheets were strong so they entered into this period with a lot of cash in reserve so they haven't yet felt the pain of interest rate increases but we expect that to start over the next quarter or two.

Dr. Jane Rennie:
That is a really significant difference in interest rates between people who might be on fixed and if you've got the very best deal at the very best time you could, you might actually have a wand in front of your fixed interest rates and then at the other end, there are people now who are on variable rates of up to 6%. I wonder, I'm thinking, that was the case, Gavan, for individuals, individuals with mortgages? Is that the same for business loans? Are there lots of business owners who would've fixed in an interest rate also?

Gavan Ord:
Yes. There would be a lot of business loans fixed as well. Business loans are usually at a higher rate anyway because business loans represent a greater risk. They don't necessarily have the security of a property behind. But yes, many of them are fixed and we understand that many of these fixed rates will actually expire this year and many of those businesses like mortgages will start having to pay at a higher variable rate.

Dr. Jane Rennie:
Once businesses and individuals do come off fixed rates, can many businesses then expect to see that drop off in trade and will that affect certain sectors more than others?

Gavan Ord:
Well, I think definitely there will be a slowdown in business trade and turnover some time in the first six months of this year, particularly in areas where there's discretionary spending such as hospitality and some retail. But there are other areas where you are selling items which may be a cheaper alternative to a more expensive item so those particular businesses might actually experience an increase in sales. But overall, if you are looking ahead for 2023 and planning a sales, I would be including scenarios of a 5%, 10%, or higher decline in sales, just so you can see how that would impact your business.

Dr. Jane Rennie:
I'd hazard a guess then if you're an insolvency practitioner, you might actually see an increase in business insolvencies this year. Do you think that's inevitable in those trading conditions?

Gavan Ord:
Well, nothing's inevitable, Jane, but to answer your question, yes, there is going to be an increase in business insolvencies this year. That's for a number of factors. Not necessarily because of higher interest rates. Well, everyone knows that the government, Australian government and the state government, has provided a lot of money to business during COVID to keep them open so it did keep a lot of businesses that would otherwise have closed open. Also, a lot of businesses incurred very large deferred rent liabilities and deferred tax liabilities. Those challenges will come home to roost for any businesses this year and for some of them, the best option will be insolvency or possibly the only option for them will be insolvency. For other businesses, it might be a restructure, it might be selling off a few assets but I think one of our key messages is that insolvency is not necessarily a bad thing, insolvency allows other businesses to prosper and thrive. Also, from the business owner point of view, it gives an opportunity to have a look at other business opportunities.

Dr. Jane Rennie:
Gavan, you mentioned a couple of challenges that businesses faced last year. Another one was in fact supply chain issues and that had the effect of keeping prices high in many instances. Are supply chain issues going to continue to impact businesses this year in the same way?

Gavan Ord:
Well, probably not. We're starting to see... China is now coming back online. Businesses are now trading through COVID disruption. So some of those disruptions which occurred particularly January, February, this time last year won't necessarily occur now but we'll probably see supply disruptions in specific items. So our listeners may be aware that there's a shortage of frozen chips in Australian supermarkets at the moment so there's issues there. In New Zealand, I understand there's problems with accessing eggs. So people in New Zealand are struggling to make their pavlovas. So I think we're going to see some supply disruptions but in specific items, not the broad supply disruptions that many businesses suffered in 2022 and 2021.

Dr. Jane Rennie:
I'm interested, Gavan, to know in these business conditions, what's likely to happen to wages and what can employees expect or business owners expect in terms of how they pay their staff?

Gavan Ord:
So unemployment is at a 48-year low. We are still going through a skill shortage in Australia and elsewhere. Now, that skill shortage is likely to come off a bit as immigration comes back and overseas students return to Australia but we still have a labour shortage and a skill shortage. So what does that mean? Well, wages growth, wages pressure will increase but the expectations are that wages will go up at a pace lower than inflation so some people will continue to experience decline in real wages. The other thing to note is in Australia, the parliament has recently passed changes to industrial relations and one of the driving factors behind that legislation is to try and get real wages growth going so government is very much looking to try and encourage real wage's growth.

Dr. Jane Rennie:
It feels like there's a real tension there both between the difficult conditions that businesses are facing and the skills shortage. I feel like if employees are experiencing low wage growth, that might make it more attractive for them to look around for other job opportunities. Do you think we might see increased levels of workforce mobility this year?

Gavan Ord:
I think, and we've discussed this before, for many people, the best way to get a salary increase is actually to change jobs. So we've heard many stories of people changing jobs getting 10% or 20% pay increase. So that sort of financial incentive, particularly in an era where we got rising interest rates and higher energy costs and other costs, that'll weigh on people's minds and think, "Well, if I can't get a wage increase on my current employer, I'll look to go elsewhere." And so, we might see an increase in labour mobility. But equally, on the other hand, as you said, there's a balance there. People might be concerned about the economy so in those sorts of situations, people also tend to stay with their employer. So it depends on someone's motivations but we might see a little bit of an increase in labour force mobility, particularly if employers are not willing to increase salaries for employees at a reasonable rate.

Dr. Jane Rennie:
In fact, it is possible, isn't it? That there could be an increase in unemployment this year as consumers slow their spending and in light of the fact that, as you mentioned, immigration will pick up and international students will return. So it is possible that some businesses might slow their recruitment, do you think?

Gavan Ord:
I think so and we've heard stories of larger businesses starting to think about things like recruitment freezes and even planning some small numbers of redundancies. So we might see an increase in the unemployment rate but I think it still will remain below 5% but there might be just an increase in unemployment.

Dr. Jane Rennie:
Would an increase in unemployment actually assist the RBA? Is that something that they'd ever plan for because it could put downward pressure on inflation?

Gavan Ord:
Well, one of the key objectives of the RBA is to deliver full employment so it's never an objective of the RBA to increase the unemployment rate but it is potentially a consequence of a slowing economy. So if the unemployment rate actually starts to increase more than what the RBA is comfortable with, then they might start to decrease interest rates to tackle that. So it could be a consequence of higher interest rates but the RBA is not seeking to a higher unemployment rate.

Dr. Jane Rennie:
Looking at the economy broadly now, you said that last year the economy expanded but the pace of this began to slow in the second half of the year. What's the economy likely to do this year?

Gavan Ord:
I think low levels of growth will persist this year. So I think in the October budget, the government forecast growth at around 1.5% and I think that's about right. So I think the economy will grow but the pace of the growth will be low and nothing like the 5%, 6% we experienced in 2022.

Dr. Jane Rennie:
Well, I have seen the R word, that recession, mentioned in the press but is your sense that we're actually safe from a recession or say, from the technical definition, two consecutive quarters of negative growth or could we slide into a recession?

Gavan Ord:
There is a possibility that Australia could fall into a recession but I think that's very, very low. Sorry. I wouldn't say very, very low. I think it's still very low. But then, if you look at some of our major trading partners, the UK Central Bank, the Bank of England is forecasting a recession for the UK, Reserve Bank in New Zealand is forecasting a recession for New Zealand. Recessions are likely in the US and other parts of Europe so some of our major trading partners are likely to go through a recession. All the indicators are in Australia, that's unlikely at this stage but the level of growth will slow.

Dr. Jane Rennie:
Even if that did happen, Gavan, with some of our major trading partners and that would evidently impact Australia, Australia is also reliant on some other countries who might have a good year this year in terms of economic growth. Is that right?

Gavan Ord:
Yes. So that's a really good observation. If you look at some of our other major trading partners, obviously China, it's a bit hard to predict what will happen there this year but India is expecting quite robust rates of growth at around about 7%. They're a growing and important trading partner for Australia and other economies in the region, Indonesia, Philippines, Vietnam, are all looking at 6%+ growth. So some of our trading partners, while some of our more traditional trading partners may struggle this year, some of our other trading partners are looking to likely have very positive years and that'll have a positive impact on Australia's economy.

Dr. Jane Rennie:
Gavan, this government is taking a very different approach to economic orthodoxy than the previous one and they are much more comfortable intervening in the market. Is there much the government can do, however, to step in and support businesses through another challenging year?

Gavan Ord:
I think this government, like the previous Australian government, I think they're a little bit hesitant to step in and support businesses at this stage because that may actually add stimulus to the economy and the worst thing that the government could do to add to cost of living pressures is to actually overheat the economy. So I think the government will not implement strategies to support businesses generally but what we are seeing for them is focused support on areas of greatest concern for them like climate change. So I don't see them doing too much to support businesses overall because that might actually have negative impacts on the economy but they will put money towards areas of concern for them like advanced manufacturing and climate change.

Dr. Jane Rennie:
I guess you certainly wouldn't expect to see any type of austerity measures this year either.

Gavan Ord:
I don't think that's going to be the case. The treasurer, Jim Chalmers, has made it clear that they're not going to go into austerity, they're going to re-prioritise spending. So in the October mini budget, there was some re-prioritising of spending from the previous government and we're going to probably see more of that in the May budget but I can't see the government pursuing austerity at this stage and I don't think that's probably the right policy at this stage.

Dr. Jane Rennie:
Well, that's all we've got time for today. Thanks very much to our guest expert, Gavan Ord. With Interest is a weekly podcast. If you like what you've heard today, why not subscribe on your favourite podcast app?

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