The May economic outlook for Australian businesses

Headline issues at a glance for Australian businesses

Growth and recession fears

Across the world, economic growth remains below average. It’s likely to continue slowing, despite China’s recent rebound after local authorities eased COVID-19 restrictions.

“There are headwinds coming from weaker global growth,” says Macquarie Group Senior Economist Justin Fabo. 

While this slowdown will likely extend to Australia, at this stage, the country is well placed to avoid a recession.

The labour market

Nevertheless, unemployment is expected to rise, with signs already that job vacancies – that is, available unfilled jobs – have started to decline.  Figures from the Australian Bureau of Statistics (ABS) showed a 4.9% drop in vacancies from August to November last year, and another 1.5% decline from November 2022 to February 2023.¹

Inflation

Domestically, all eyes will be on inflation and how the Reserve Bank of Australia (RBA) responds. Although annual inflation appears to have peaked at 7.8% at the end of 2022, it remains much higher than the RBA would like and well above the target band of 2-3%.

Services inflation has proven especially sticky, and as explained further below, the RBA may further increase the cash rate to curb ongoing price increases.

The cash rate

Some of the key factors which may influence the RBA’s cash rate decisions include:

1. Global activity, including inflation.
2. Developments in both the Australian and global labour markets.
3. Inflation in Australia.

Although the RBA has already done much of its monetary policy tightening  – increasing the cash rate 11 times from May 2022 to May 2023 – there remains some space for the cash rate to rise further, based on how these factors are tracking.

The residential property market

The cash rate increases and the subsequent interest rate knock-ons comes as Australia’s residential property market has recorded price rises in some pockets.

Typically, property prices fall, or the rate of increase slows, as interest rates climb – a relationship which has held true for the better part of the last 30 years. Though recent property price data does not reflect that trend, a closer look suggests it’s too early to call a significant turnaround.

What’s behind the price rises? The answer lies in where the bulk of property price increases have been recorded – inner Sydney, specifically, properties in the top 25% by value. This market segment has experienced the fastest gains in the past few months, but prices for high-end properties had also dropped the most previously, with 15-20% drawdowns common.

More broadly, in most parts of the economy, housing prices are either still falling or flattening out – these trends are expected to continue in the near-term.

Talent: the ongoing challenge

One of the bigger ongoing challenges these economic conditions pose for Australian businesses is expected to come from the labour force.

Macquarie Bank Executive Director Grant Robson says, even if the labour market loosens, competition for talent will remain stiff, with associated labour costs likely remaining elevated.

“All of our conversations with customers at the moment still revolve around human capital,” Robson says.

“The number one topic of conversation for them is around how they can adjust their pricing to ensure they maintain their margins given these higher labour costs,” he says.

Although employers can expect to see labour costs increase, they will likely need to offer other perks to make the case for employment more compelling.

“Good quality businesses are addressing war on talent with opportunity and recognition,” Robson says.

“We're seeing younger and younger people in many professional practices now promoted to principal, equity or partner level than I think we've seen in a long time.”

You can read Macquarie Business Banking’s guide on attracting and retaining talent in a competitive market here.

Pathways to growth

Businesses with healthy balance sheets and attractive employee propositions may be presented with a new opportunity to grow in the coming months, through buying other businesses.

It’s a common tactic during tougher economic conditions, Robson says. Even during periods, such as the global financial crisis (GFC), forward-thinking business leaders have been able to expand their operations.

“Consolidation and acquisition are the opportunities strong operators are seeing in these labour challenges and interest rate challenges,” he says. “They're taking this as an opportunity, having done the work to get their business in a good position.”

Robson believes consolidation is more likely in some industries than others, such as residential real estate.

Business owners will also need to be prepared to move quickly, says Robson. Anyone considering acquisitions could ask themselves:

• How does this align with my business strategy in the long term?
• How long will it take me to complete an acquisition?
• What data will I need to provide to my banker?
• How long should I expect to be under due diligence?
• What is my purchasing capacity?
• How much will I need to fund the deal and make any necessary changes or improvements?

Anyone who’s unclear on the answers to these questions should look to start the conversation with their banker sooner rather than later, Robson adds. 

Your business needs 

We hope our insights help support your ambitions, as we move through 2023. At Macquarie Business Banking, we’d welcome the opportunity to speak with you as you navigate this shifting environment.