Economic risks expected in 2023

Oksana Patron

7 October 2022

The Australian economy is ‘relatively well-placed’ compared to other parts of the world, but it will see a slower growth in the next few months, with the key economy risks expected in 2023, due to lags in monetary policy and Australia’s ‘unique sensitiveness’ to interest rates, according to BlackRock.

Central banks around the world, including the Reserve Bank of Australia (RBA), are currently in a difficult situation as they tussle with bringing the growth down to get inflation under control while understanding, at the same time, the negative consequences of squeezing the economy.

But in Australia the effectiveness of the RBA policy can be a “bit more immediate”, relatively to other parts of the world, due to the “almost immediate” sensitiveness of the local economy to interest rates.

“The interesting part about Australia is that transmission mechanism of rates to economic activity is far more acute than in America where you can have 30-year fixed rate mortgages and it takes longer for that to feed through the economy,” BlackRock Australasia’s head of fundamental active equities, Charlie Lanchester, said during the webinar on Wednesday.

According to him, the equities market at the moment is currently “very much in the limbo state” as it is waiting to see what effect the rate rises will have.

During the covid pandemic, when interest rates went down to close to zero, there was a huge amount of rebooking of mortgages as people decided to lock in fixed rate type of mortgages.

However, those mortgages are typically fairly short-term, three to five years, and this would be a key time to watch for the market to see what the real impact would be.

“There will be a slow roll off of some of those very low fixed mortgages but the effect when that actually happens will be significant and this is what equity market is worried about,” Lanchester stressed.

“As consumers roll of 2% mortgage to what will be probably around 6% mortgage rate that is tripling of their monthly cash costs and it’s not until it actually happens that the [consumers] moderate and change their spending behaviour.

“The market obviously looks ahead and we have seen consumer stocks in the discretionary space sell-off and we have also seen property stocks self off aggressively but looking forward it is going to become a much more of stock pickers market.”

Further to that, Craig Vardy, BlackRock Australasia’s head of fixed income, said that even though the recent economic data still pointed to a relatively strong economy, the full impact of rate rises in the economy was weighing in on the RBA’s mind, with the central bank was “clearly sensing that there may be some stresses in the economy”.

“I think in general the outlook for the Australian economy still looks ok, the path for the rate hikes for the RBA looks to be 25 bases points improvements from here on [but] there is a fair bit of uncertainty around when they will look to tighten: is it November or will they pause in December and wait to see how the things play out. That is probably highly likely now, it’s very much a wait and see approach from the bank now,” he said.