The 2023 outlook from Macquarie Business Banking

The 2023 economic outlook

2023 is set to be a year of transition for the global economy, as central banks try to strike a balance between curbing inflation and mitigating risks of recession. This backdrop of slowed economic growth presents a new set of conditions for Australian businesses to navigate. 

“Australia has considerable economic momentum at the moment, but the RBA has hiked aggressively and with the global economy slowing, we too will slow,” Macquarie Chief Economist Ric Deverell says. 

“Australia is better positioned than most other countries, so we may avoid a recession, but it’s going to be touch and go.”

Despite the challenges on the horizon for 2023, the last few years have been a clear reminder that growth-focused businesses can, and do, capitalise on the opportunities in change. 

Five headline issues for businesses in 2023

1. Rising cost pressures  

Both the cash rate and inflation have increased at pace in the last 12 months, adding to cost pressures for business leaders.   

The trajectory of the cash rate is dependent on how the economy tracks this year. At this stage, the likely scenario is that the Australian economy will slow, meaning the RBA would be nearing the end of its cash rate rises. 

Inflation should also slow this year, especially in the first half. However, given the inflation rate is at 7.8%, well above the RBA’s target of 2-3%, it’s likely to take some time before business and household budgets feel relief from inflation easing. 

Despite signs that cash rate and inflation relief may be on the horizon, costs are expected to continue rising this year. 

“The cash rate has gone up considerably in the last six to nine months, which is making its way through the system. What that means is the clients, or business communities, haven’t really felt the full impact of it yet,” says Head of New and Emerging Segments at Macquarie Business Banking, Eli Glotzer.

As rate hikes flow through to the real economy, businesses will need to not only understand how that will affect their cost base, but also how it may flow into their earnings. 

“It could have a double whammy impact from a margin pressure perspective. If revenue reduces and costs continue to rise, the overall profit margin could considerably deteriorate.”

In this environment, it is more crucial than ever that businesses keep a close eye on their financial performance and future cash flows.

Whether re-thinking resourcing allocations, looking at interest rate hedging, or paying down debt where possible, there are ways businesses can relieve some of the cost pressure they face in the new year. 

“Assess and manage your cost base with regular forecasts and scrutiny of the business’ cost base and don’t be afraid to implement change after assessing your business’ financial health,” says National Head of Property Services at Macquarie Business Banking, Lisa Kearney.

Those who can understand the risks in their business and deal with them proactively will be better set up to succeed in 2023, she adds.

“Some difficult decisions may need to be made in terms of adjusting staffing, your product base, or your growth targets to ensure your business restructures, and is ready for a more challenging economic environment. Make sure these decisions are data-led and use metrics to track their progress.”

2. A competitive labour market 

Pent-up demand from the pandemic coupled with staff shortages has contributed to one of the tightest labour markets in Australia in half a century, with the unemployment rate recorded at 3.5% at the end of last year.  

While unemployment is expected to rise in 2023, meaning the labour market won’t be as tight as the last 12 months, businesses will still need to carefully manage the consequences of a competitive market in the year ahead. 

“The last 12-18 months has seen wages, salaries, investment in people increase. So that fixed cost structure I think will come into focus,” says Professional Services State Leader at Macquarie Business Banking, Richard McCabe. 
 
“If we do have a slowdown in terms of revenue and profitability, it’s that fixed cost that will really hurt businesses.”

Staffing challenges, however, go far beyond simply keeping a lid on wages. With fewer quality applicants looking for work, it’s never been more important to engage and retain current staff. 

“A lot of new starters or recent starters have gone into businesses over the last 12-18 months. So, all that training, development and effort to get those people working and effective, it’s now important that they’re locked in from an employment perspective, otherwise there will be considerable ongoing productivity impacts,” says Glotzer.

While a competitive job market has driven up fixed costs, keeping and attracting talent doesn’t have to become a bidding war. Instead, businesses need to consider what else they can offer current and prospective staff. 

“Are you providing flexibility? Are there other elements around training and development that might help retain people or potential equity opportunities for new shareholders?” suggests Glotzer.

3. Pressure on property

The residential property market has been in decline since last year, with Sydney experiencing the fastest price falls in the last 40 years. 

“Unfortunately, with interest rates likely to move a little bit higher and stay 
higher, I think there’s going to be more pain, but by the end of the year, my  
guess is that things will be stabilising and then hopefully we can resume another cycle in 2024," says Deverell.  

“The RBA is in play, they’re going to hike a little bit more, interest rates are high and that’s going to have a really big impact on the property market.”

Australia’s commercial property sector is expected to perform well relative to the rest of the world this year, driven in part by strong population growth. Favourable demographics are expected to support returns and liquidity, yet there will be challenges ahead in 2023. 

“Our capital markets are exposed to global macro events which may dampen returns and transactions in 2023, to some degree. Any pricing softness may create opportunities for those real estate investors with liquidity and capital to deploy,” says David Roberts, Head of Real Estate at Macquarie Asset Management.

Among those with “weaker fundamentals” are secondary offices and properties with elevated leasing risk, with Roberts suggesting these may require further refinancing. 

He adds that real estate investors with “more equity and strong relationships with lenders” appear to be better placed to take advantage of such a market and the discounts that can arise in it. 

4. Changing dynamics in the commercial property market 

Higher interest rates going into 2023 are expected to have an impact on the market and potentially the makeup of buyers within it. 

“Highly levered investors and public real estate companies that are trading at large discounts to underlying property values are likely to be less active in 2023,” says Roberts.

They’ll likely make room in the market for smaller investors, including high net worth individuals, family offices, and private firms, Roberts says.

As the nature of workplaces continues to evolve, for example to cater to a more flexible workforce, the commercial property market is following suit. Though it might seem the pandemic triggered this, this shift had been in play for many years prior, and the market is moving past the temporary disruptions of mass work from home orders. 

“I think the shift to a hybrid working model is permanent, but we expect to see occupancies recover further in Sydney and Melbourne as more people return to the office, at least two to three days a week,” says Roberts. 

This year, we are likely to also see the continued appeal of spaces that are ESG-friendly, in central locations, and with collaborative and technology-enabled spaces. 

“I think the office sector is likely to remain polarised with corporates and governments showing a preference for high quality space in well-connected locations with high energy efficiency ratings.

“We also see occupiers and workers wanting more collaboration space and meeting rooms to cater for the increased use of technology in the workforce.

“Widening discounts for lower quality space will create opportunities to reposition older offices or covert them to other uses, such as hotels or rental housing.”

5. Consolidation in the market 

While an economy in transition may be an anxious prospect, it can also be an opportune time to review your business and find new ways forward. For those that have had a good run coming out of the pandemic, it may be the perfect time to prepare for the next business cycle.

“The challenge I think for those type of businesses is to think strategically around what next. Where do we go from here? Is it growth, and is that acquisition or organic? Is it stay small, or be big? Is it change that business model?” says McCabe.

“Our best businesses are thinking like that and trying to capitalise on the strength of their balance sheet and strength of the market.”

For some operations, that may look like shoring up their financial position, paying down debt and deleveraging. For others, it might be about finding new ways to expand in what may prove to be a more challenging 12 months for peers.

“Consolidation of the market is a huge opportunity for those stronger businesses to accelerate their book. And it’s an opportunity for people who want to exit to do that,” Kearney says.

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.