Consumers won’t pull Australia’s economy out of its slump, says Deloitte report

And Deloitte economists said if interest rates rise any further, the country could be tipped into a recession.

With 2022 characterised by rising inflation and interest rate hikes globally, Australia fared better than most countries, said Deloitte Access partner and report lead author, Stephen Smith.

“The year was characterised by the sharpest inflation surge in four decades and a substantial, synchronised tightening of interest rates across most advanced economies,” he said.

“The strength of the consumer in rebounding out of the pandemic lockdowns and back into shopping centres was an important reason why Australia’s economy has grown at pace over the last 12 months. Unfortunately, it’s also an important reason why Australian economic growth is expected to slow dramatically throughout 2023.”

Mr Smith said low levels of consumer confidence and negative real wage growth are expected to combine to see spending growth decelerate markedly over coming months.

“That outcome shouldn’t be a surprise given Australia is still only part-way through one of the most significant declines in real household disposable income per capita on record,” he said.

The weak outlook for both household consumption and dwelling investment will see economic growth of just 1.7 per cent, the report revealed, down from 3.6 per cent in 2022.

“In our view, any further increases in the cash rate beyond the current 3.1 per cent could unnecessarily tip Australia into recession in 2023. On the Reserve Bank’s own figuring, mortgage repayments, including principal and interest, are already on track to rise to a record high as a share of household disposable income over coming months,” Mr Smith said.

“At the same time, real household disposable income per capita — a key measure of prosperity — is falling, and will finish the current financial year at levels last seen before the onset of the pandemic. There is no doubt that Australian households are starting to hurt.”

Industry experts also expect a consumption-driven slowdown throughout 2023, though some sectors of the economy will fare better than others.

“It is not good news for the retail industry, which has fared relatively well over the past 12 months following the relaxation of COVID-19-related restrictions,” Mr Smith said.

“The outlook for retailers is far less rosy as cost of living pressures hit households. The finance and insurance industry is also expected to see more modest near-term growth as the industry adjusts to a higher interest rate environment.”

The report stated a consumer-led slowdown in 2023 will play out differently across the country, with the larger consumption- and housing-dominated states in Australia’s south-east the most vulnerable to higher interest rates.