Aussie economy more exposed to housing stress

Oksana Patron

26 October 2022

Although the prospects for the Australian economy for the next 12 months are generally bright, despite rapid rate rises aimed at combatting inflation which were clouding the global outlook, it is far more exposed to housing stress than global peers, according to State Street Global Advisors (SSGA).

The firm’s “Australian and global macro outlook” pointed to the housing market and they way it reacted to rate hikes as the possible stress and the main downside for the local economy, given that the household debt to income ratio in Australia was almost twice that of the US.

This means that any increases in mortgage costs had bigger impact on consumer spending, which was the main stalwart for the local economy.

Additionally, one of the key closely watched indicators, which were new home loan commitments, fell 3.4% for the third month in a row in August and was down 17.5% from its peak in January indicating the property prices could correct by nearly 20% from their peak.

“Looking ahead, we expect the RBA to remain hiking through H1 2023, albeit less aggressively than global peers. We expect rates to then be on hold for the rest of 2023 as inflation returns near target and growth remains resilient to cooling external demand,” the outlook found.

The SSGA’s outlook for the Australian economy for the next 12 months, which was overall positive despite the bearish global sentiment, expected economy would grow at 4% in 2022 helped by robust consumer spending and favorable terms of trade, before it would moderate to 2.4% in 2023.

At the same time, the outlook for the next year was expected to be clouded by weakening external demand as global monetary tightening neared a peak.

“At its last meeting, the Reserve Bank of Australia (RBA) provided a sign that they will moderate the pace of hikes in contrast to the hawkish stance of peer central banks. Despite this dovish surprise, we think the policy rate could climb to 3.0% by December and peak near 3.60%, as we expect price pressures to stay above RBA’s target for longer. Hence, there is some room for the RBA to hike into 2023, with a diligently hawkish Federal Reserve (Fed) exacerbating this view,” the SSGA’s outlook confirmed.