The quarterly outlook from Macquarie Business Banking

A wrap of the Australian economy

The Australian economy remains strong relative to other advanced economies, despite tightening financial conditions as we shift away from the pandemic’s emergency settings and support.

As we move through the last quarter of 2022, headwinds are on the horizon, with recessions looking likely in advanced economies overseas in 2023. Australia is set to fare better than most, however, we have an open economy that is impacted by events on the global stage.

Five updates for Australian businesses

1. The labour market

The Australian labour market remains tight, with unemployment at 3.5%, its lowest in almost 50 years. Hiring demand is strong, and business leaders are continuing to find it difficult to secure new talent.

In this environment, we see growth-focused businesses attending to the core features of their employee experience to attract and retain talented people, and remain competitive. This includes their hybrid working arrangements, salary packages, culture and employee development strategies.

In the new year, it’s likely the story will change for the labour market, as the economy starts facing growth constraints.

"In a forward-looking sense there’s a couple of things that will determine how easy it is to get labour,” says Senior Australian Economist at Macquarie Group, Justin Fabo. “The first one is the borders reopening, and a pickup in population growth, that will help in terms of the availability of labour.”

“The second one is probably less favourable. We are expecting a decline in demand growth in the economy, and an increase in unemployment. That’ll make it easier to get staff, but the bigger issue for businesses will be slower growth in demand.”

2. The residential property market

Many business leaders use a residential property to support their business loans, and it’s understandable if they’re concerned about the impact of risks to valuations.

At the national level property prices are falling, however, the experience so far and trajectory is not the same across all states, cities and regions.

For example, Sydney is leading price falls, dropping approximately 10% from its peak, while prices have been flat in Adelaide and Perth. Further, demand for regional properties – which spiked during the pandemic – has fallen, and relatively quickly in some areas.

Further falls in the residential property market are expected in the coming quarter and moving into 2023.

"At the national level we are expecting a peak-to-trough fall of around 15%, a bit larger in Sydney and Melbourne as usual, and a bit less in the other capital cities,” says Fabo.

In this environment, it’s important to remember short-term thinking can be to the detriment of long-term goals. The key to managing through a market dip is ensuring you’re making decisions that ladder up to a big-picture strategy.

3. The commercial property market 

The commercial property market in Australia has been relatively resilient through consecutive months of cash rate rises. Historically, rising rates have put downward pressure on values. That said, like with the residential market, there are near-term risks and challenges on approach.

“In terms of the outlook for the coming quarters, I think there is some inevitability that we will see commercial property prices declining,” says Laurence Hart, National Head of Property Lending at Macquarie Business Banking.

“That said, there are a couple of factors that may offset that. The main one is the resilience of the economy and the banking system relative to previous downturns,” he says. “These things can help insulate against potential downward movements.”

Business leaders have reasons to be cautious in the current environment, however, the market isn’t showing signs of a major, irrecoverable downswing. Like with the residential property market, as risks to the downside continue, making decisions based on your long-term goals remains important.

4. The cash rate

In recent months, the cash rate has moved up at its fastest pace since the 1990s, meaning the cost of finance has increased for individuals and businesses alike. As it stands, this pace looks set to slow into 2023.

“We do think interest rates continue to go up from here, but most of the heavy lifting in terms of the increase in interest rates we think has already happened in Australia, and the rate of increase has slowed,” says Fabo.

Still, the rising costs of finance is a core consideration for cash management. Many business leaders are being cautious in their planning until they are confident the cash rate is stabilising. Proactive cash management is important as always, such as ensuring your business is taking advantage of the opportunities a rising interest rate environment presents for cash deposits.

5. Inflation

The rising cost of living is something that is especially impacting the clients of Australian businesses, and the upward pressure is set to continue through the quarter.

Though Australia is faring better than other developed economies, such as the United Kingdom, inflation is still at its highest level in several decades.

“In terms of the outlook for inflation and when we can expect some reprieve, it’s certainly a 2023 story,” says Fabo.

“For the next couple of quarters at least, we are expecting inflation to remain quite high. It’s not really until the middle to latter part of next year that we are expecting inflation to come down materially.”

In this environment, we see business leaders continuing to carefully manage and assess their pricing, inputs, budgets, and cash flow – and expect this prudent and proactive approach will continue into 2023.

Your business needs 

We hope our insights help support your ambitions, as we move through the final quarter of 2022.  At Macquarie Business Banking, we’d welcome the opportunity to speak with you as you navigate this shifting environment.