Westpac Economic Overview, October 2023 – Trick Or Treat?

Westpac has just released its latest Economic Overview.

“Inflation is likely to remain above the Reserve Bank’s 1-3% target range for all of 2024,” noted Chief Economist Kelly Eckhold. “While we are seeing lower imported goods and food inflation, domestic price pressures are still running red-hot.”

“We continue to forecast a protracted period of sub-trend economic growth,” noted Mr Eckhold. “Ongoing slow growth will be critical to restraining domestic inflation.”

“Households will continue to be squeezed as rising interest rates increasingly bite,” noted Mr Eckhold. “A significant portion of past interest rate increases are still to pass through to borrowers.”

“The new government will likely tighten the fiscal purse strings in coming years to try and bring the budget back to balance,” observed Mr Eckhold. “This should see the government’s share of total economic activity decline and will somewhat help reduce inflation pressures. Nonetheless, budget deficits will likely persist in coming years and the Government will have to make some tough choices given that population growth will increase demand for core public services and infrastructure.”

“Strong inward migration continues to support the economy and we expect these inflows to persist for longer than previously thought,” said Mr Eckhold. “Population growth is running at multi-decade highs and is adding to demand as well as the productive capacity of the economy.”

“The housing market has bottomed and is now starting to turn higher again. Higher long-term interest rates will restrain future house prices to some extent but the impact of the surge in population will be significant. On balance, we expect house prices will rise by 8% over 2024.”

“The policies of the new centre-right government will support the housing market by improving after-tax returns for investors who have been less keen on housing investment in the last couple of years.”

“A major headwind for the economy continues to be weakness in our key trading partner economies, most notably China. We remain concerned that weaker external demand will weigh on the prices of some of our key exports. As a result, Westpac has revised down the speed at which commodity prices will rebound in coming years.”

“Our sense is that further monetary policy action will still be required to ensure that inflation will fall in a timely manner. That’s why we expect a further increase in the Official Cash Rate in the first half of next year, and only gradual rate reductions from early 2025,” Mr Eckhold concluded.

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