Professor Jana Bowden: Will 'revenge' spending continue?
The crystal ball looking into the future of the economy in 2023 is looking rather opaque at present, with an entire range of contradictory factors at play.
On the one hand, we are seeing the continuation of a post-Covid ‘revenge’ spending boost that has been resilient through Christmas and the holiday period. Likewise, travel spend remains buoyant, too, with consumers keen to stretch their wings. Current travel activity is now back at pre-pandemic levels and on par with 2019 (ABS).
The opposing forces that were already building in 2022 are still very much in play as we tentatively enter 2023.
If we zoom out and look at the bigger picture, we’ll see that overall consumer confidence was up five per cent in January, which is the largest monthly gain since April 2021. It’s clear consumers are feeling more upbeat about their finances compared to a year ago. But snapshot data can be deceiving if it’s not put within a broader context.
Last year brought the fastest annual increase in the Consumer Price Index in 20 years with inflation accelerating through 80 per cent of the non-discretionary goods and services categories in the index, mortgage rate hikes, energy prices spiking and consumer sentiment subsequently plummeting to recession-like levels.
That turbulence and psychological effects of these factors on the consumer takes time to ‘hit’. The opposing forces that were already building in 2022 are still very much in play as we tentatively enter 2023, and they will continue to shape both consumer confidence and spending habits throughout the year.
When we look at the overall mindset of the consumer this year, consumer confidence is in line with deep recessionary levels experienced in the early 1990s. The data on whether consumers think it’s a good time to buy a major household item is also telling. with the index running at very pessimistic levels by historical standards.
In addition, we are seeing an interest rate hike and inflation-pinched household budget being put under increasing strain. Consumers are experiencing financial stress.
Cost-of-living ravaged consumers are reassessing their budgets and pulling the purse strings tighter. Affordability often wins over brand loyalty in times of financial pressure and consumers are increasingly looking to make their money stretch further.
While we are only in the opening throes of 2023 these changes in the consumer mindset can certainly be considered an early omen for what is to come in consumer sentiment this year. With the outlook for 2023 uncertain, it is clear consumers already have the jitters.
Jana Bowden, pictured, is a Professor of Marketing in the Macquarie Business School.
Dr Rohan Best: Choice and flexibility for workers set to continue
Bargaining power for workers starts the year at higher levels than before the pandemic. Unemployment rates have remained around record lows, with many industries experiencing labour shortages.
The year ahead is likely to see a combination of higher wage inflation and continued flexibility for some employees. Wage inflation has started to accelerate, following years of only modest wages growth. But even the higher wage inflation still trails consumer price inflation, leading to cost-of-living pressures.
Instead of major real wage increases above consumer price rises, employees may instead benefit from the flexibility to switch employers, have greater choice over their hours and where they work. Surveys tend to show that many workers expect to retain the flexibility to work from home at times.
Being unable to pay energy bills is one of the most common forms of financial stress.
Spiralling home energy prices starting in 2022 have begun to present a major source of cost-of-living pressure, especially for some households such as those not benefiting from wage inflation. Being unable to pay energy bills is one of the most common forms of financial stress.
Rapid increases in electricity and gas prices are likely to continue in the short term. The question is: What do we do about it?
Household responses will include varying combinations of switching providers, cutting consumption, investing for greater energy efficiency, and hoping that government intervention will effectively cap the price increases. Investing in solar panels offers great potential where possible, with continued growth predicted for small-scale solar, for both households and businesses.
Dr Rohan Best, pictured, is a Senior Lecturer in the Department of Economics at the Macquarie Business School.
Professor David Orsmond: Recession remains a risk
If policy is the intersection of the economic challenges and its associated politics, then we are in for an interesting year. The Albanese Government, working with state partners, will need to take actions across several short, medium and longer-term issues to shore up the country’s future.
The inflation challenge is the most pressing short-term issue. Interest rates increased by three per cent in 2022 as the RBA tries to reduce the high demand for goods and services as households spend down the Covid-induced boost to their savings.
With little sign yet that inflation has peaked, more rate rises seem likely in the coming months, despite the risks of a consequent recession. That puts big pressures on the May Budget, where the government will be trying to meet calls for cost-of-living relief and to fund rapidly rising disability and military spending while not adding to demand pressures through its own actions and starting to pay down the Covid-induced debt overhang.
With little sign yet that inflation has peaked, more rate rises seem likely in the coming months.
It will be a political challenge for Labor to crab-walk away from its election commitment to deliver the Morrison Government’s 2024 tax cuts that largely go to high-income individuals.
The biggest medium-term challenge is to lift Australia’s dismal productivity performance. In the absence of a rise in output for each hour worked, growth of real (after inflation) wages will remain weak.
While the list of potential structural reforms is well known, political will to confront the affected interest groups has been largely missing for over a decade. But just mandating higher wages to targeted groups simply adds to the cost base and output prices unless accompanied by new efficiencies. Embracing artificial intelligence technologies can lift our future output, though upskilling and managing the transition towards a new way of doing things is a multi-year task.
Finally, navigating the longer-term issues of climate change, an ageing society, and the emergence of China and India into the global economic and geopolitical system will also keep the government’s hands full in 2023. Hang on tight.
David Orsmond is a Professor of Economics in the Macquarie Business School.
Dr Lurion De Mello: Energy prices still high but cost of fuel to stabilise
The world continues to experience high energy costs. Petrol and diesel prices have dropped but electricity bills are hitting everyone’s pockets.
The cost of electricity in the United States rose 14.3 per cent from 2021 to 2022. The Albanese government recently introduced price caps on gas and thermal coal. These artificial caps are meant to keep the cost of generating electricity down. They seem to be working.
Wholesale prices of electricity have dropped in NSW and QLD in 2023 and it's unlikely those savings will be passed on to us anytime soon. That's because our electricity and gas suppliers have us locked into contracts based on much higher prices.
The regulators including the ACCC should ensure that savings are passed on at least in the second half of the year. The fuel excise was slapped back on in September 2022. Gas and coal price caps cannot remain in place indefinitely. Free markets cannot operate efficiently when someone tries to control prices artificially.
Petrol prices are likely to be under control in 2023 if crude oil prices hold steady.
Both sides of politics are throwing punches to see if Australians will pay more for their energy bills. There is a scheme in the UK that pays you money if you consume less electricity. This could also work here. The emphasis has mostly been on clean generation of electricity and moving away from coal and gas. We need incentives on the demand side as well. Australians need to watch their electricity consumption particularly when it comes to heating and cooling solutions.
We need an independent body that provides a stable and sensible energy policy as we try to reduce our dependency on fossil fuels. Australia needs to rethink its energy policy. The adoption of solar and wind continues to rise but the primary source for creating electricity is predominantly coal. Coal-fired powered stations have come back to life in Europe.
It will be a disaster if we shut coal-fired stations too early in Australia. We are slowly sorting out our domestic gas supply issues. We will need to replace coal with gas-fired power stations. There are too many lessons to be learnt from the European energy crisis that began before the Russian invasion of Ukraine.
Petrol prices are likely to be under control in 2023 if crude oil prices hold steady. Electricity generation costs could blow out resulting in bankruptcies in the electricity retail sector, particularly if the price of coal remains high in 2023.
Dr Lurion De Mello, pictured, is a Senior Lecturer in the Department of Applied Finance at the Macquarie Business School.
